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INTRODUCTION  TO  PUBLIC   FINANCE 


y^^y^ 


THE  MACMILLAN  COMPANY 

NEW  YORK   •    BOSTON   •    CHICAGO 
SAN    FRANCISCO 

MACMirXAN  &  CO,  Limited 

LONDON  •  BOMBAY  •  CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANAt)A,  Ltd. 

TORONTO 


i 


•INTRODUCTION 

TO 

PUBLIC    FINANCE 


CARL   C.   PLEHN,  Ph.D. 

PBOFBSSOR    IN   THE    UNIVERSITY   OF   CALIFORNIA 


"•/e  rCimpost  rien,  je  ne propose  meme  Hen;  y expose^ 

DUNOTER 


THIRD   EDITION 
COMPLETELY   REVISED  AND  ENLARGED 


Neto  gorit 

THE   MACMILLAN   COMPANY 

1916 

AU  rightx  renerved, 


^1 


CoPYEiGHT,  1896,  1909, 
By  the  MACMILLAN  COMPAifY. 


Set  up  and  electrotyped.  Published  August,  1896.  Reprinted 
August,  1897.  Second  edition,  revised.  May,  1900;  July,  1902; 
August,  1904;  January,  1906. 

New  edition,  published  September,  1909  ;  January,  December^ 
igil  ;  April,  1913;  June,  1914;  July,  1915;  July,  1916. 


Norfajooli  ^resa 

J.  8.  Gushing  Co.  —  Berwick  &  Smith  Co. 

Norwofxi,  Mass.,  U.S.A. 


PREFACE   TO   THE  THIRD  EDITION 

In  its  third  edition,  this  book  has  been  revised  through- 
out, partly  rewritten,  and  considerably  enlarged.  The 
statistics  and  other  illustrative  data  have  been  brought 
down  to  date,  and  discussions  have  been  introduced  of 
some  of  the  more  important  of  the  fiscal  questions  which 
have  come  into  prominence  since  the  first  edition  was 
written. 

By  using  the  book  with  his  classes  in  Public  Finance 
at  the  University  of  California,  the  author  discovered 
many  points  in  which  he  thought  it  might  be  improved. 
He  has,  also,  gratefully  adopted  many  suggestions  kindly 
offered  by  his  colleagues  who  have  used  the  book  in  other 
colleges  and  universities.  During  the  period  that  has 
elapsed  since  the  publication  of  the  first  edition,  the 
author  has  had  much  experience  at  first  hand  with  the 
actual  administration  of  public  fiscal  affairs.  This  expe- 
rience was  gained  both  in  his  home  State,  California, 
and  in  the  Philippines.  This  intimate  contact  with 
taxation  in  the  doing  and  in  the  making  has,  on  the  one 
hand,  modified  the  author's  views,  and  on  the  other 
hand  should  have  aided  him  in  his  endeavor  to  make 
the  book  more  useful  to  officers  concerned  with  taxatioriN^ 
and  to  legislators  and  their  advisers. 

341795 


vi  PREFACE    TO    THE    THIRD  EDITION 

In  addition  to  the  general  revision  outlined  above,  the 
following  items  may  be  specifically  mentioned :  the  defi- 
nitions and  explanations  intended  to  aid  the  beginner 
have  been  sharpened  and  clarified,  and  many  new  ones 
have  been  added ;  more  space  is  given  to  French  taxa- 
tion; the  chapter  dealing  with  the  American  general 
property  tax  has  been  entirely  rewritten  from  a  new 
point  of  view  and  very  much  enlarged;  the  description 
of  that  "  great  engine  of  the  revenue,"  the  British  income 
tax,  has  been  revised,  primarily  with  a  view  to  making 
it  more  easily  understood  by  American  readers;  Henry 
George's  "single  tax,"  although  still  disapproved,  is 
much  more  sympathetically  treated;  appendices  have 
been  added  to  two  of  the  chapters,  giving  an  outline  of 
the  valuable  work  done  by  the  United  States  Census 
Bureau  on  the  classification  of  public  expenditures  and 
of  public  revenues;  and  inasmuch  as  the  first  edition 
seems  to  have  found  quite  as  many  readers  in  England 
as  in  America,  the  effort  has  been  made  in  the  selection 
of  new  material  to  choose  those  things  which  may  be  of 
equal  interest  in  both  countries. 

LUCBENB,  SWITZEBLAND,  AugUSt,  1909. 


PREFACE   TO   THE  FIRST  EDITION 

This  Introduction  to  Public  Finance  is  intended  to  be 
an  elementary  text-book.     It  contains  a  simple  outline 
of  those  things  which  are  necessary  to  prepare  the  stu- 
dent for  independent  research ;  a  brief  discussion  of  the 
leading  principles  that  are  generally  accepted;   a  state-j| 
ment  of  unsettled  principles  with  the  grounds  for  con-l/ 
troversy ;    and  sufficient  references  to  easily  accessible/j 
works  and  sources  to  enable  the  student  to  form  some 
opinion  for  himself.     The  references  that  are  given  are 
not  so  much  for  the  purpose  of  sustaining  the  author's 
statements,  which  any  advanced  student  or  teacher  can 
easily  trace  to  their  sources,  as  to  enable  the  beginner  to 
add  to  his  information  on  points  that  are  of  necessity 
briefly  treated  here. 

Both  the  American  and  the  English  systems  of  taxa-  f 
tion  are  badly  in  need  of  reform.  Public  opinion  is 
gradually  awakening  to  this  need.  Financial  questions 
are  widely  discussed.  There  can  be  no  doubt  that  the 
most  pressing  reforms  of  the  close  of  the  nineteenth  , 
century  are  tax  reforms.  The  rapid  extension  of  govern- 
mental functions  —  the  invasion  by  the  government  of 
fields  of  activity  that  lie  near  to'the  welfare  of  the  people 
—  has  given  rise  to  great  interest  in  the  financial  side  of 

vii 


Viii  PREFACE    TO    THE  FIRST  EDITION 

these  activities.     It  is  hoped  that  this  work  may  be  help- 
ful ill  the  accomplishment  of  these  needed  reforms. 

The  Introduction  to  Public  Finance  can  be  intelli- 
gently studied  by  any  person  already  familiar  with  the 
general  principles  of  Political  Economy.  Technical 
details  and  wearisome  tables  of  statistics  have  been 
avoided  wherever  possible.  Abundant  references  to  sta- 
tistical compilations  are,  however,  given,  so  that  such 
matters  can  be  readily  looked  up  if  wanted.  The  coun- 
tries whose  financial  systems  have  been  chiefly  used  to 
illustrate  principles  are  England,  Germany,  France,  and 
the  United  States;  other  countries  have  been  drawn 
upon  only  for  particularly  pertinent  examples.  A  brief 
but  complete  history  of  the  financial  practices  of  the 
four  countries  named  has  been  given.  The  countries 
most  extensively  studied  are  England  and  the  United 
States.  Although  the  book  has  been  written  from  the 
point  of  view  of  an  American,  the  author  ventures  the 
hope  that  it  may  not  prove  the  less  useful  to  English 

students. 

CARL   C.   PLEHN. 
Berkeley,  Cal.,  August,  1896. 


TABLE  OF  CONTENTS 

INTRODUCTION 

Section  1.  Definition,  scientific  character,  and  relations  of  Public 
Finance.  Sec.  2.  History  of  the  science.  Sec.  3.  Method. 
Sec.  4.  Divisions  of  the  subject.  Sec.  5.  Desirability  and  feasi- 
bility of  a  single  method  of  classification  throughout  the  whole 
subject.     Page  1 

PART   I 
PUBLIC  EXPENDITURE 
CHAPTER  I 
^  The  Nature  of  the  State  and  its  Functions 

Section  1.  Political  science  sets  no  definite  limits  to  the  extension 
of  State  functions.  Sec.  2.  Public  Finance  finds  a  limit  in  the 
revenue-yielding  strength  of  the  State.  Sec  3.  Public  expendi- 
ture in  early  times.  Sec.  4.  Public  expenditure  in  Greece  and 
Rome.  Sec.  5.  Feudal  expenditure  and  the  beginnings  of  mod- 
ern.    Sec.  6.  Classification  of  expenditures.    Page  18 

Appendix 

The  official  classification  of  expenditures  by  the  United  States 
Census  Bureau. 

CHAPTER  II 

\/ Expenditure  exclusively  for  the  Common  Benefit 

Section  1.  Expenditure  for  general  administration.    Sec.  2.  Ex- 
penditure for  the  legislative  department.      Sec  3.   Expendi- 
ture for  public  buildings.     Sec.  4.   Expenditure  for  defence. 
Sec.  5.  Expenditure  for  means  of  transportation.    Sec.  6.  Ex- 
ix 


X  C0P7TENTS 

penditure  for  education.    Sec.  7.  Assistance  of  private  industry 
and  commerce.     Page  39 

CHAPTER   III 

^    Expenditure  for  the  Benefit  of  Individuals 

Section  1.  Expenditure  for  charities.  Sec.  2.  Pensions.  Sec.  3. 
Bounties  and  "protection."  Sec.  4.  Expenditure  for  the  ad- 
ministration of  justice.  Sec.  5.  "Betterment"  of  property. 
Sec.  6.  Expenditure  in  public  industries.     Page  62 

PART  II 

PUBLIC  REVENUES 

CHAPTER   I 

The  Character  and  Classification  of  Public  Revenues 

Section  1.  Early  forms  of  revenue.  Sec.  2.  The  growth  of  con- 
stitutionalism results  in  uniformity  of  the  revenue  systems  of 
the  different  countries.  Sec.  3.  Different  States  tind  the  same 
justification  of  taxation.  Sec.  4.  Compulsion  is  universal. 
Sec.  5.  Classification  of  revenues,  definitions  of  fees,  taxes, 
and  rates.  Secs.  6  and  7.  Further  considerations  on  classifi- 
cation.    Page  79 

Appendix 

The  United  States  Census  Bureau  classification  of  revenues.  Page  94 

CHAPTER  II 

The  Various  Kinds  of  Taxes,  Fees,  a;^d  Rates  ;  Definitions 

Section  1.  The  measure  of  taxation  distinguished  from  the  justi- 
fication ;  benefit  theory  and  faculty  theory.  Sec.  2.  Difficulties 
in  the  classification  of  taxes.  Sec.  3.  Direct  and  indirect  taxes. 
Sec.  4.  Taxes  on  persons,  property,  and  income.  Sec.  5.  Other 
classifications  of  taxes.  Sec.  6.  Classification  of  fees.  Sec.  7. 
Economic  revenues.  Sec.  8.  Definitions  of  various  terms  used. 
Page  103 


CONTENTS  Xi 

CHAPTER  in 
The  Tax  System 

Section  1.  All  nations  use  many  different  taxes;  no  single  tax 
feasible.  Sec.  2.  What,  in  the  opinion  of  nations,  constitutes 
the  ideal  of  correct  or  just  taxation.  The  benefit  theory ;  the 
legal  theory  in  the  United  States.  Sec.  3.  The  faculty  theory  ; 
what  constitutes  faculty.  Sec.  4.  Other  theories  and  progres- 
sion.    Page  133 

CHAPTER  IV 

The  Development  op  Taxation  before  the  Industrial 
Revolution 

Section  1.  Feudal  dues  commuted,  and  voluntary  contributions  be- 
come taxes.  Sec  2.  History  of  taxation  in  France.  Sec.  8. 
History  of  Crown  taxation  in  England.  Sec.  4.  History  of  local 
taxation  in  England.  Sec.  6.  Colonial  taxation  in  America. 
Page  153 

CHAPTER  V 

The  Development  of  Tax  Systems  since  the  Industrial 
Revolution 

Section  1.  The  effect  of  the  industrial  and  political  revolutions. 
Sec.  2.  General  outline.  Sec.  3.  Development  of  taxation  in 
Prussia.  Sec.  4.  In  France.  Sec.  5.  In  England.  Sec.  6.  In 
America.    Page  175 

CHAPTER  VI 

Excises 

Section  1.  Comparison  of  excises  and  customs ;  and  direct  con- 
sumption taxes.  Sec  2.  Purposes  and  principles  of  the  ex- 
cises. Sec  3.  Method  of  assessment.  Sec.  4.  Typical  excises. 
Sec  5.  Proper  field  for  excises.     Page  204 


Xii  CONTENTS 

CHAPTER  VII 

Customs  Duties 

Sections  1  and  2.  Customs  duties  defined.  Secs.  3  and  4.  The  pur- 
poses of  customs  duties,  both  fiscal  and  political.  Protective 
and  revenue  tariffs.  Sec.  5.  The  protective  principle  widely 
applied.  Sec,  6.  The  tax  character  of  protective  duties.  Sec  7. 
Customs  duties  as  a  source  of  revenue.  Sec.  8.  History  of  cus- 
toms duties  in  England.  Sec.  9.  The  German  customs  union 
and  the  Imperial  tariffs.  Sec  10.  History  of  the  French  tariff. 
Sec.  11.  Tariff  history  of  the  United  States.     Page  218 

CHAPTER  VIII 

Property  Taxes 

Part  1.     The  General  Property  Tax.     With  Special  Beference 
to  the  United  States 

Section  1.  The  place  of  the  general  property  tax  in  the  revenue 
system.  Sec  2.  The  types  of  the  general  property  tax.  Sec  3. 
The  property  subject  to  this  tax.  Sec  4.  The  property  exempt 
from  this  tax.  Sec  5.  The  forms  and  methods  of  assessment, 
and  the  valuation  of  the  property.  Sec  6.  The  taxation  of 
mortgages,  and  of  money  and  credits  other  than  mortgages. 
Sec  7.  The  taxation  of  corporation  franchises.  Sec  8.  The 
objections  urged  against  the  general  property  tax.  Sec  9.  The 
scientific  judgment  on  the  general  property  tax.     Page  246 

Part  2.     Special  Property  Taxes 

Sec.  10.  The  land  tax.  Sec  11.  Building  tax.  Sec  12.  Taxation 
of  capital.     Sec.  13.  Inheritance  tax.     Page  295 

CHAPTER   IX 

Personal  Taxes 

Sbctign  1.  Poll  tax.  Sec  2.  Theory  of  the  income  tax.  Sec  3. 
Place  of  the  income  tax  in  the  tax  system.  Sec  4.  Prussian 
income  tax.  Sec  5.  The  British  property  and  income  tax. 
Sec  6.  Income  taxes  in  the  United  States.     Page  312 


CONTENTS  Xui 

CHAPTER  X 

The  Incidence  of  Taxation 

Section  1.  Incidence  depends  upon  the  system  ;  meaning  of  shift- 
ing and  incidence.  Sec.  2.  Shifting  may  or  may  not  defeat  the 
purpose  of  the  tax.  Sec.  3.  Shifting  adds  to  the  burden  of 
taxation.  Sec.  4.  Shifting  cannot  take  place  when  taxes  are 
universal  and  equal.  Sec.  5.  Incidence  of  excises  and  cus- 
toms. Sec.  6.  Incidence  of  the  general  property  tax.  Sec  7. 
Incidence  of  special  property  taxes  and  of  personal  taxes. 
Page  336 

CHAPTER  XI 

Fees  and  Industrial  Earnings 

Section  1.  Connection  between  fees  and  industrial  earnings ; 
development  of  fees  into  taxes.  Sec.  2,  Judicial  and  legal 
fees.  Sec.  3.  Administrative  fees.  Sec.  4.  Special  assess- 
ments. Sec.  5.  Postal  fees.  Sec.  6.  Revenues  from  public 
property.     Sec.  7.  Revenue  from  public  industries.    Page  347 

PART   III 
PUBLIC  INDEBTEDNESS 
CHAPTER  I 
The  Growth  and  Nature  of  Public  Credit 
Section  1.  Size  of  public  debts.     Secs.  2  and  3.  The  nature  of 
credit.     Sec  4.    Wherein  public  credit  differs  from  private. 
Sec  5.  Economic  effects  of  public  borrowing.     Sec  6.  Foreign 
and  domestic  loans.     Page  366 

CHAPTER  II 

Forms  of  Public  Debts 

Section  1.  Funded  and  floating  debts.  Sec  2.  Forced  and  con- 
tractual loans.  Sec  3.  Classification  of  debts.  Sec  4.  "  Per- 
petual" bonds  and  redeemable  bonds.  Sec  6.  Terminable 
annuities.      Sec  6.  Lottery  loans.     Sec  7.  The  rate  of  in- 


Xiv  CONTENTS 

terest.     Sec.  8.  Debts  of  the  treasury.     Sec.  9.  Productive 
loans.     Page  383 

CHAPTER  III 

Negotiation,  Payment  of  Interest,  Conversion,  and  Redemp- 
tion OF  Debts 

Section  1.  Two  chief  methods  of  negotiating  public  loans.  Sec.  2. 
Place  of  payment  of  interest,  and  other  minor  considerations. 
Sec.  3.  Conversion  of  the  debt.  Sec.  4.  Debt  payment  and 
the  sinking  fund  in  England.  Sec.  6.  Debt  payment  and  the 
sinking  fund  in  America.     Sec.  6.  Summary.    Page  401 


PART   IV 

FINANCIAL  ADMINISTRATION 

CHAPTER  I 

The  Budget  ;  Administration  of  Expenditure  ;  Control  and 
Audit 

Section  1.  Importance  of  sound  methods  of  administration. 
Sec.  2.  History  of  fiscal  administration.  Sec.  3.  The  budget 
in  England,  and  appropriations  in  the  United  States.  Sec.  4. 
English  control  and  audit.  Sec.  5.  Control  and  audit  in  the 
United  States.     Page  415 

CHAPTER  II 

Collection  of  the  Revenues  ;   Custody  of  the  Funds  ;   and 
the  Public  Accounts 

Section  1.  Early  methods  of  collecting  revenues.  Sec.  2.  Collec- 
tion of  customs  duties  and  excises.  Sec.  3.  Assessment  of 
direct  taxes,  "declaration,"  and  equalization.  Sec.  4.  Con- 
venience of  the  contributor  must  be  consulted  in  the  collection 
of  taxes.  Sec.  5.  Transfer  of  the  public  funds  and  custody  of 
the  public  moneys.  Sec.  6.  Public  accounts  in  England  and 
America.    Sec.  7,  "  Funds  of  account."    Page  431 


CONTENTS  X\ 

CHAPTER  III 

Financial  Administration  op  War  ;  Illustrated  by  the  Expe 

RIENCE    OF   the    UnITED    StATES    IN   THE    WaR   WITH    SpAIN 

Section  1.  "Extra-ordinary"  expenses.  Sec.  2.  Increased  ra  js 
for  old  taxes.  Sec.  3.  New  taxes.  Sec.  4.  Difficulties  in  .he 
use  of  credit.  Sec.  5.  Situation  of  the  United  States  Tre?  jury 
at  the  outbreak  of  war.  Sec.  6.  The  tariff  could  not  be 
changed.  Sec.  7.  Main  resource  internal  taxes.  Sec.  8.  Yield 
of  new  taxes.  Sec.  9.  Amount  borrowed.  Sec.  10.  Preserva- 
tion  of  credit.     Sec.  11.  A  popular  loan.     Page  445 

Brief  Bibliography  for  Supplementary  Reading.    Page  466 

Index.    Page  469 


IS,     •     •     » 


•      0 


'^  ;:  V  .      \^  ;■ 


INTRODUCTION  TO  PUBLIC  FINANCE 

INTRODUCTION 

Section  1.  Public  finance  deals  with  the  way 
in  which  the  State  acquires  and  expends  its  means 
of  subsistence.  It  stands '  in  somewhat  the  same 
relation  to  the  State  that  economics  stands  to  the 
individual.  If  economics  were  defined  as  the  science 
which  deals  with  the  activity  of  the  practical  reason 
in  acquiring  and  applying  those  things  that  are  pro- 
vided in  comparatively  limited  quantities,  for  the 
satisfaction  of  the  external  and  temporal  wants  of 
man,  then,  adapting  our  definition  to  somewhat  the 
same  terminology/  public  finance  would  be  de- 
fined as  the  sciencS'which  deals  with  the 

Deflnitiotu 

activity  of  the  statesman  in  obtainmg  and 

applying  the  material  means  necessary  for  fulfilling 

the  proper  functions  of  the  State.^ 

1  When  used  by  itself,  without  a  modifying  adjective,  the  term 
"  finance  "  often  has  a  broad  meaning,  and  may  cover  not  only  the 
receipts  and  expenditures  of  governments,  but  also  matters  relating 
to  the  capital,  income,  and  expenses  of  corporations,  associations, 
partnerships,  and  even  of  individuals.  By  metonymy  it  is  applied 
also  to  the  forms  which  the  several  items  just  named  may  take, 
and  to  the  business  transactions  through  which  they  may  pass. 

B  1 


2         ,      II^TR^pijCfJON   TO   PUBLIC  FINANCE 

Public  finance  ma}^  be  called   a   science,  because, 
(1)  it  deals  with  a  definite  and  limited  field  of  human 
knowledge;   (2)  it  admits  of  an  orderly 
called  a  arrangement  of  its  facts  and  principles, 

science.  ^^^  contains  many  laws  of  general  prog- 

ress belonging  exclusively  to  its  own  field ;  (3)  it 
admits  of  the  application  of  scientific  methods  of  in- 

Thus  it  includes  money,  notes,  bonds,  stocks,  etc.,  and  transactions 
therein,  together  with  all  the  forms  and  methods  of  banking.  In 
common  usage,  "to  finance"  a  transaction,  whether  conducted 
by  the  government,  by  an  association,  or  by  an  individual,  is  to 
provide  the  "funds,"  which  may  take  the  form  of  taxes,  money, 
evidences  of  indebtedness,  or  records  of  investment,  for  the  further- 
ance of  the  transaction.  Thus  Cleveland's  book  on  the  Funds 
and  .Their  Uses  covers  matters  that  are  in  this  sense  "  financial." 
To  guard  against  ambiguity,  it  is  customary  to  designate  each  of 
these  various  uses  by  some  appropriate  adjective.  Thus  we  have 
"corporation"  finance,  "trust"  finance,  "private"  finance, 
"public"  finance,  and  many  other  kinds  of  finance.  "When  used 
without  modification,  as  in  Bolles'  book  on  American  Finance,  and 
in  his  Financial  History  of  the  United  States,  or  by  Dewey  in  a 
book  with  the  same  title,  it  covers  public  receipts,  expenditures, 
and  indebtedness,  and  also  money  and  banking,  in  so  far  as 
these  have  been  the  subject  of  governmental  concern  and  formal 
action.  Yet,  on  the  other  hand,  Adams'  Science  of  Finance  deals 
exclusively  with  matters  relating  to  public  finance. 

Of  the  two  adjectives  relating  to  our  subject,  "financial"  and 
"  fiscal,"  the  former  has  all  the  ambiguity  that  is  found  in  the 
noun  from  which  it  is  derived,  while  the  usage  of  the  latter  is 
purer.  The  adjective  "  fiscal "  usually  means,  relating  to  public 
finance,  to  the  exchequer,  or  to  the  public  treasury.  The  noun 
"fiscal"  is  not  in  common  usage  in  English,  although  it  has  some 
sanction.  It  might  be  used  to  designate  any  officer  who  has  to  do 
with  the  final  enforcement,  by  legal  procedure,  of  the  collection  of 
the  public  revenues.  In  this  sense  it  recalls  the  original  meaning 
of  ^nare,  to  pay  a  fine.  Thus  in  Spanish  countries  the  "fiscal" 
is  a  special  attorney,  or  prosecutor,  attached  to  the  treasury  de- 
partment.    Unless  the  meaning  of  the  adjective  is  perfectly  cleai 


INTR  OD  UC  TION  % 

vestigation  ;   (4)   it  foresees  as  well  as  explains  a 
certain  class  of  phenomena.     That  it  is  generally,  if 
not   universally,    so   regarded    confirms    this  view. 
It  is,  however,  a  secondary  or  dependent  4  dependent 
science.     It   is   closely    related    to   two  science. 
other  larger  sciences,  upon  which  it  properly  depends. 
These  are  economics  and  political  science.     While, 
on   the  one    hand,  it  draws  largely  upon   the  con- 
clusions of  these  two  sciences  for  its  hypotheses,  and 
for  some  of  its  principles,  yet  on  the  other  it  con- 
tributes  much   to   them.  /Most   of   the   prominent 
German  writers  on  the  subject  regard  public  finance 
as  a  corporate  part  of  economics,  or  at  least  of  the 
r^lrlpr^^THTfTfal  Pnnnomy.i   Jtjs_properly  so  regarded. 
4TeT;s:usF"fEF"aclivities  ^^  thft  i^tnt^  w>ijpbj;»^4^4*»fl^tn 
this  field  are  /:^f  ^nrh  ^  riatnrp.  n.s  to  consume  waaUli, 
pvnrl^in^  wpalfli^  and   tn  interfere  with  the  distribu- 
tiotLj)f  wealth.     From  political  science,  public  finance 
has  to  borrow  many  conclusions  as  to  the  nature  of 
the  State,  and  as  to  the   functions  of  government. 
A  determination  of  what  the  proper  functions  of  the 
State  should  be  is  no  part  of  our  subject,  but  be- 
longs wholly  to   political  science.^     In  general,   it 

from  the  context  "  fiscal "  is  preferable  to  "financial."  Thus,  it  is 
customary  in  English  to  speak  of  the  "fiscal  year,"  but  never  of 
the  "  financial  year,"  when  referring  to  public  affairs. 

1  The  modern  conception  of  economics  as  a  science  which  has 
less  to  do  with  political  and  more  with  individual  activities,  would, 
perhaps,  exclude  public  finance. 

2Fordisci-ssionsof  that  part  of  the  subject  the  reader  is  referred 
to  Bluntschli's  Theory  of  the  State,  Wilson's  State,  Hoffman  a 
Sphere  of  the  State,  and  Crane  and  Moses'  rolitics. 


4  INTRODUCTION  TO  PUBLIC  FINANCE 

has  been  found  best  to  assume  that  the  functions 
now  actually  performed  by  any  government  are 
proper  for  that  government,  provided  they  are  not 
clearly  contrary  to  som^generally  accepted  princi- 
ples of  political  science.  /  We  are  thus  relieved  of  the 
burden,  assumed  by  many  writers  on  the  subject, 
of  attacking  or  defending  the  actions  of  different 
governments  in  matters  the  propriety  of  which  is  open 
to  discussion;  for  example,  the  propriety  of  the  contin- 
uance or  assumption  of  State  owirfership  of  railroads, 
or  the  State  monopoly  of  tobacco.  1  All  such  matters 
will  be  treated  purely  from  the  fiscal  point  of  view. 
Information  concerning  the  facts  with  which  the 
science  of  public  finance  deals  can,  in  most  instances, 
_      ^  ^        be  definitely  ascertained  and  the  conclu- 

The  art  of  ^ 

public  sions  drawn  have  often  a  sharpness  and 

jinance.  distinctness  lacking  in  many  other  parts  of 

political  economy  and  political  science.  There  is 
consequently  a  strong  temptation  to  create  the  cor- 
responding art  of  public  finance.  For  when  any 
science  bscomes  at  all  "  exact,"  it  is  easy  and  often 
desirable  to  point  out  possible  direct  applications 
of  the  truths  learned.  But  although  it  is  of  the 
utmost  importance  that  statesmen  should  be  guided 
in  their  actions  by  correct  principles,  it  is  in  no 
sense  the  duty  of  the  scientist,  as  such,  to  make  the 
application  of  the  laws  he  may  learn.  Scientific 
investigation  should  precede,  and  ever  remain  inde- 
pendent of,  any  possible  use  of  the  truths  discovered. 
In  no  other  way  than  by  the  search  for  truth  for 


INTRODUCTION 


5 


its  own  sake  ciin   we  obtain   absolute  clearness  of 


view. 


Sec.  2.  Public  finance,  as  a  science,  is  older  tnan 
political  economy.  Indeed,  it  is  not  incorrect  to  say 
that  it  was  the  forerunner  of  both  of  the 

.     .  Older  than 

sciences  to  which  it  is  now  subordinate;  political 
for  the  writings  of  the  cameralists  dealt  ^^^^^^^y- 
more  fully  with  this  part  of /the  field  of  political 
economy  than  with  any  other.  I  Cameralistic  science, 
or  public  finance  as  an  art,  and  as  the  subject  of 
conscious  study,  necessarily  arose  as  soon  as  there 
was  a  distinct  separation  between  the  income  of  the 
Government,  or  the  State  as  such,  and  the  income  of 
the  Prince  ;  that  is,  as  soon  as  any  direct  levy  was 
made  upon  the  wealth  of  the  citizens,  or  any  prop- 
erty was  administered,  to  secure  a  revenue  for  an  ac- 
knowledged public  purpose  broader  than  the  mere 
support  of  the  Prince's  household.  The  demand 
for  officials  properly  trained  to  administer  the  vast 
princely  and  public  revenues  which  flowed  into  the 
public  coffers  led  to  extensive  studies  in  just  this 
line;  and  then  the  investigation  into  the  origin  and 
causes  of  the  wealth  of  nations,  as   the   foundation 

1  This  must  be  regarded  as  the  author's  ideal  and  aim.  But  he 
found  himself,  even  in  writing  the  first  edition,  unable  to  live  up 
to  that  ideal,  in  every  instance,  and  occasionally  entered  the  field  of 
criticism,  and  advocated  some  reforms.  This  edition  is  still 
further  "marred,"  or  "enriched,"  whichever  way  the  reader 
may  regard  it,  by  new  excursions  into  the  "  art  of  public  finance." 
On  account  of  the  strength  of  his  convictions  the  temptation  to  voice 
them  has  been  too  powerful  to  be  resisted. 


6  INTRODUCTION   TO  PUBLIC  FINANCE 

and  source  of  public  revenues,  was  the  step  which 
led  to  the  birth  of  the  greater  science  of  economics. 

The   writers   on  the  cameralistic   science  (which, 

because  it  at  first  embraced  but  little  more  than  the 

matter   now   included   in    public    finance,  may    be 

properly    claimed   as   that    science    under    another 

,name)   were  stronger  in   Germany  than  elsewhere.^ 

I  On   this   account   the   science   has    always     had    a 

Vs^stronger  hold  there  than  in  France  or  England.      In 

Only  parts  of  those  countries  the  lead  of  the  Physio- 

the  subject        cratic  doctrine,  the  powerful  influence  of 

treated  by  n'l  t         !>  i-« 

English  Adam    Smith,  and,    alter   his  time,   the 

writers.  intensity  and  rapidity  of  industrial   de- 

velopment, directed  the  attention  of  students  in  such 
fields  to  the  more  general  and  more  absorbing  ques- 
tions. Although  Adam  Smith  himself  devotes  one 
book  to  the  discussion  of  finance,  and  other  writers 
of  note  give  it  passing  attention,  it  was  extremely 
slow  in  obtaining  recognition  as  an  independent 
science.  The  predominance  in  both  England  and 
France  of  a  theory  of  State  which  minimised  the 
importance  of  government  action  may  account  in 
part  for  this  neglect.  The  one  portion  of  the  sub- 
ject that  did  receive  general  attention  —  namely, 
taxation  —  dealt  with  an  activity  that  was  admittedly 
necessary.  But  other  fields,  like  that  of  expenditure, 
were  comparatively  neglected.  The  tendency  of 
English  economists  to  underrate  the  importance  of  a 

1  For  an  account  of  them  see  Eoscher,  Geschichte  der  National 
Oekonomie  in  Deutschland. 


IN  TR  OD  UC  TION  7 

study  of  consumption,  except  so  far  as  it  led  to  new 
production,  prevented  them  from  seeing  anything 
worth  studying  in  State  expenditure  beyond,  possibly 
its  effect  on  new  revenues.  Hence  it  is  that  while 
Germany  piled  treatise  on  treatise,  all  deep,  schol- 
arly, and  broad,  covering  the  whole  subject  of  public 
finance,  we  had  to  wait  until  1892  for  a  systematic 
treatment  of  the  whole  field  in  the  English  language, 
and  we  still  await  such  a  one  in  French.^  It  must 
not  be  understood  that  portions  of  the  subject  were 
not  investigated  in  those  countries.  There  are,  on 
the  contrary,  many  important  works  on  the  various 
parts  of  the  science.  But  what  was  entirely  lacking 
until  the  appearance  of  Bastable's  Public  Finance,  in 
1892,  was  an  attempt  to  systematise  the  whole 
'subj( 

Financial  problems  are  becoming  more  importanl 
because  the  functions  of  government  which  depend 
on  them  have  grown  in  importance  and   rj^^  ^^^^^^ 
number.     Our  industrial,  commercial,  and  growth  of 
social    organisation    has    become    more 
and  more  complex,  and  it  hence  requires  better  and 
more  effective  governmental  organisation  to  keep  it 
running  smoothly.     The  more  important  it  becomes 
to  perfect  governmental  organisation,  the  more  do 
questions  affecting  the  supply  and  application  of  its 
material   support    rise   into   prominence.      Whether 
w'e   regard   the   constant   expansion   of   the   State's 

1  Leroy-Beaulieu,  however,  covers  all  but  expenditure  in  a 
masterly  manner. 


8  INTRODUCTION   TO  PUBLIC  FINANCE 

activities  with  favour  or  disfavour,  it  is  equally 
important  that  the  financial  problems  arising  from 
these  activities  should  be  solved.  Consequently 
Professor  Bastable's  work  has  been  followed,  by  a 
flood  of  special  articles  and  by  a  number  of  notable 
treatises.  Especially  prominent  among  such  pub- 
lications in  the  English  language  are  Professor 
H.  C.  Adams'  Science  of  Finance,  Professor  W.  M. 
Daniels'  Elements  of  Public  Finance,  Professor  E. 
R.  A.  Seligman's  various  essays  and  intensive  studies 
of  intricate  and  important  questions,  and  the  transla- 
tions of  Professor  Cohn's  writings.  During  the 
past  decade  many  governmental  commissions  have 
made  extensive  investigations  and  have  published 
their  findings  in  able  and  instructive  reports.^ 

Sec.  3.  On  account  of  the  close  relation  existing 
between  public  finance  and  economics,  most  of  the 
The  same  discussions  as  to  the  proper  method  for 
methods  avail-  the  latter  bear  with  equal  force  upon  the 
able  as  in  .  o      t-»         i  i-  J^  i^      •   i 

political  former.2.    But  the  nature  oi  the  materials 

economy.  ^i^]^  which  public  finance  deals  is  such 
that  in  general  the  inductive  method  has  a  wider 
possible  scope,  and  the  deductive  a  narrower  field 
than  in  the  larger  science.  The  historical  and  com- 
parative method  is  most  serviceable  for  ascertaining 
the  conditions  under  which  different  kinds  of  taxa- 
tion develop.  The  general  effects  of  taxation,  its 
shifting  and  incidence,  the  effect  of  expenditure  and 

1  See  Bastable,  3d  edition,  pp.  36  and  37,  for  other  works.  Also 
Stammharamer,  Bihliographie  der  Finanzwissenschaft,  Jena,  1903, 

2  Cf.  Keynes'  /Scope  and  Method  of  Political  Economy. 


INTRODUCTION  9 

public  debts,  can  be  studied  deductively.  The  de- 
ductions in  this  case  are  derived  from  the  conclusions 
reached  by  the  previous  method,  and  from  principles 
derived  from  political  economy.  Inasmuch  as  the 
purpose  of  the  present  book  is  merely  to  expound 
principles  already  determined  by  the  science  and  to 
use  the  facts  of  financial  practice  rather  as  illustra- 
tion than  as  proof  of  the  doctrines  advanced,  it  will 
not  be  necessary  to  acquaint  the  reader,  in  each  case, 
■with  the  method  used  to  ascertain  the  truths  stated. 
In  the  main,  therefore,  we  shall  follow  what  has 
been  aptly  called  the  method  of  instruction,  which 
is  in  a  sense  an  inverted  induction,  in  which  the 
principle  is  first  stated  and  then  sufficient  facts  are 

adduced  to  show  that  the  principle  is  true. 

Sec.  4.  The  subject  falls  naturally  into  four 
parts:  (1)  public  expenditure,  (2)  public  revenue, 
(3)  public  debts,  (4)  financial  adminis-  Bwuion  of 
tration.  Of  these,  public  expenditure  the  subject. 
and  financial  administration  have,  until  recently,  not 
been  the  subject  of  important  works  in  the  English 
language,  and,  therefore,  a  few  words  in  defence  of 
their  incorporation  are  necessary.  Public  expendi- 
ture is  as  much  a  part  of  public  finance  as  consump- 
tion is  of  economics.     While  it  belongs  peculiarly  to 

political  science  to  determine  what  the  lines  of  €X- 
p^diture  shall  be,  just  as  it  belongs  to  ethics  to 
teach  the  individual  in  what  direction  he  should  use 
his  wealth,  yet,  when  the  lines  of  expenditure  have 
been  determined,  its  form,  amount,  and  effect  belong 


10  INTRODUCTION   TO  PUBLIC  FINANCE 

to  public  finance,  just  as  the  form,  amount,  and  effect 
of  consumption  belong  to  economics.  Consumption, 
or  the  satisfaction  of  wants,  is  the  end  and  aim  of  all 
production  and  distribution."  So  is  expenditure  the 
end  and  aim  of  the  collection  of  revenues  and  of  the 
other  financial  activities  of  the  statesman.  To  ex- 
clude, at  least,  a  statement  of  the  forms  and  the  cus- 
Expenditure  to^^^^T  direction  of  expenditure  would 
should  he  be  to  overlook  the  purpose  of  all  the 
included.  ^gg^^     g^^  ^j^g^g  jg  ^^^.j^  another  cojisid- 

eration  that  emphasises  the  need  of  ar  statement  of 
the  general  objects  of  expenditure,  j  The  amount 
of  expenditure  is  generally  determiWi  first,  and 
after  that  has  been  settled  the  required  revenue 
is  obtained.  In  this  public  finance  differs  mate- 
rially from  economics.  In  the  broader  science  it  is 
generally  assumed  that  the  individual  cannot  regu- 
late his  income  by  his  wants,  but  must  limit  his 
wants  to  his  income.  In  some  cases  this  difference 
fades  away.  Cities  often  have  to  forego,  temporarily 
at  least,  desirable  improvements  on  account  of  the 
increased  burden  they  would  impose  on  the  finances. 
But  in  general  we  find  that  the  modern  State  is 
quite  as  likelj^  to  neglect  some  important  and  desir- 
able function  which  it  could  perform,  as  to  increase 
its  functions  beyond  what  would  be  wise.^  If  this 
is  true,  and  that  it  is  so  will  be  seen  in  the  course  of 
the  discussion,  then  it  would  be  well  to  ascertain  the 
main  features  of  expenditure  at  the  outset.  But  we 
1  Cf.  Colin,  Finanzwissenschaft,  p.  183. 


INTRODUCTION  \\ 

are  not  obliged  to  justify  or  condemn  the  different 
lines  of  expenditure  that  are  deemed  by  the  leading 
nations  to  be  wise  or  expedient. 

Financial  administration  is  properly  regarded  as 
the  fourth  division  of  the  subject,  because  it  is  as  nec- 
essary to  know  liow  the  State  gets  its  revenues  as 
to  know  whence  it  gets  them  and  for  what  it  spends 
them.  This  department,  too,  deals  with  a  large  num- 
ber of  technical  details  which  would  only  cumber 
the  other  parts  if  taken  up  in  connection  with  them. 

Of  the  four  divisions,  public  revenue  is  necessarily 
the  largest;  probably  for  reasons  akin  to  those  that 
influenced  previous  English  writers  to  give  ^^^^^^  ^g_ 
taxation  their  exclusive  attention.     It  is  forms  make 
here  that  the  most  urgent  reforms  are  pend-  '^'^g^J^J^.^osf 
ing,  and  hence  the  need  of  understanding  important 
existing  conditions  is  most  pressing. 

The  distribution  of  the  various  financial  activities 
among  the  different  divisions  of  the  government, 
federal,  national,  or  local,  will  be  noted  in  connection 
with  the  discussion  of  each  part  of  the  subject. 

Sec.  5.    In  the  present  work  the  attempt  has  been 
made  to  use  the  same  method  of  classification  from 
beginning    to    end.     The   method    used  uniform 
is   that    suggested    by   Professor    Cohn  r^^^^^ 
for   all   public   charges,   and  afterwards  for  ail  parts 
developed  in  a  somewhat  different  way  of  the  subject. 
by  Professor  Seligman.i     The  charges  made  by  the 

iCohn,  Finanzwissenschaft,  pp.  104-118,  esp.  pp.  H^'  ^|^  J 
Seligman,  Quarterly  Journal  of  Economics,  May,  1892  and  18»0, 


12  INTRODUCTION   TO  PUBLIC  FINANCE 

government  upon  individuals  are  regarded  as  vary- 
ing in  character  according  as  the  special  benefit  cou- 
ferred  upon  the  individual  is  made  the  exact  or  the 
partial  measure  of,  or  is  not  allowed  to  affect  at  all, 
the  burden  imposed  upon  him.  Public  revenues  and 
public  debts  have  already  been  classified  in  this  way, 
and  it  is  very  easy  to  classify  public  expenditure 
and  administration  in  the  same  way. 

The  nature  of  this  classification  and  its  applicability 
to  the  whole  subject  may  be  illustrated  by  reference 

_,  ,  .to  the  well-known  customs  of  lar^e  ath- 
The,  nature  of  r..r       o 

this  ciassijica-  letic  clubs.  For  membership,  and  the 
trat  ^dT'th  ^^ual  privileges  of  the  club,  each  mem- 
practice  of       ber  is  assessed  the  same  sum,  irrespec- 

athletic  clubs.    ^. ^^    ^f   ^^^   ^^^^^^   ^^^^^^     ^^   ^^^^.^^^     ^^ 

uses  the  club,  and  without  reference  to  his  ability 
to  pay,  that  being  assumed,  for  this  purpose,  to  be 
equal  to  that  of  every  other  member,  and  certainly 
without  reference  to  any  known  ability  to  pay  more. 
This  fee  is  justified  by  the  common  benefit  conferred. 
If,  however,  the  member  makes  use  of  the  dining- 
room,  or  asks  for  special  privileges,  such  as  the  private 
use  of  the  club  quarters,  grounds,  boats,  appliances, 
etc.,  he  pays  an  additional  sum,  measured,  generally 
speaking,  by  the  special  benefit  conferred  upon  him. 

Essays  in  Taxation,  Chap.  IX.  Hints  of  the  same  classifications 
are  found  in  Malchusand  Hoffman.  See,  also,  Flehn,  Classification 
in  Public  Finance,  Pol.  Set.  Quar.,  March,  1897,  and  Nicholson, 
Principles  of  Political  Economy,  Vol.  Ill,,  Bk.  V.,  Chap.  IX. 
Especially  important  and  illuminating  is  the  "Appendix,"  begin- 
ning on  page  146  in  Bastable's  3d  edition. 


INTRODUCTION  \^ 

Again,  if  the  club  is  in  debt,  or  proposes  to  enlarge 
its  facilities,  not  infrequently  a  subscription  paper 
is  passed  around  and  each  member  is  urged  to  contrib- 
ute, not  the  same  amount  all  others  have  subscribed, 
nor  yet  in  proportion  to  the  use  he  makes  of  the  club, 
but  "as  much  as  he  is  able."  And  lastly,  there  are 
not  infrequently  cases  where  poor  but  promising 
athletes  have  been  admitted,  in  order  that  the  club 
may  have  the  glory  of  their  prowess,  and  have  been 
excused  from  dues. 

Now  there  is  an  almost  perfect  analogy  between 
such  a  club  and  the  State  in  respect  to  the  contribu- 
tions demanded,  the  benefits  conferred,  and  the 
method  of  operation.  Generally  speaking,  the  State 
endeavours,  in  collecting  revenues,  to  impose  an 
equal  1  burden  upon  all  for  the  support  of  those 
functions  that  are  regarded  as  conferring  a  common 
benefit,  and  a  special  burden  for  the  support  of  those 
activities  which  confer  a  special  benefit,  and  under 
certain  circumstances  to  increase  the  burden  imposed 
upon  the  very  wealthy,  who  are  regarded  as  able  to 
bear  more ;  and  lastly,  to  tax  all  for  the  support  of 
the  poor.  Not  that  the  State  always  succeeds  in  its 
endeavour,  nor  that  all  States  recognise  equally  the 
desirability  of  the  attempt;  for  in  public  finance  ex- 
pediency necessarily  plays  a  large  part.  But  most 
States  have  come  to  recognise  more  or  less  clearly 
these  ideals,  and  their  policy  can  be  convenientl)' 
summarised  in  this  way. 

1  What  is  meant  by  "  equal "  will  be  discussed  later. 


14  INTRODUCTION   TO  PUBLIC  FINANCE 

The  various  activities  of  the  State  can  be  easily 

classified,  according    to  the  degree   of   common    or 

State  activi-     special  benefit  they  are  supposed,  by  the 

ties  confer        lawmakers,   to  confer  upon  the  citizens, 

common  bene- 

fit  or  special     ^^  taxpayers.     1  he  various  groups  may 

benefit.  blend  or  shade  into  one  another  at  their 

margins,  but  those  activities  belonging  to  the  centre 
of  each  group  are  easily  recognisable  and  are  funda- 
mentally different  in  each.  Thus,  it  is  universally 
admitted  that  the  functions  of  the  general  adminis- 
trative and  legislative  departments  are  of  such  a  char- 
acter as  to  give  a  common  benefit,  for  which,  ideally, 
every  one  should  pay  according  to  some  scheme  of 
supposed  equality.  But  at  the  other  extreme  there 
are  many  things  done  by  the  State  which  confer  so 
special  a  benefit  as  to  justify  a  special  charge.  For 
example,  when  the  State  carries  a  passenger  or  a  box 
of  freight  over  its  railroad,  or  carries  a  letter,  or  pro- 
vides the  citizens  with  china  or  tobacco,  it  confers  a 
special  benefit.  Between  these  two  extremes  there 
are  any  number  of  grades,  according  as  the  predomi- 
nant thought  is  that  of  common  or  special  benefit, 
when  both  ideas  are  present.  But  there  is  one  more 
consideration  that  must  be  introduced.  There  are  a 
certain  number  of  State  activities  which  it  is  in  the 
interest  of  the  whole  to  have  performed,  but  which 
accrue  to  the  special  benefit  of  certain  classes,  who 
on  account  of  poverty  are  unable  to  pay  for  that 
benefit ;  and  if  the  State  is  to  perform  these  functions, 
it  must  call  upon  the  other  classes  for  assistance,  ex- 


iNTR  OD  UCTION  \  5 

eusing  the  poorer.  Theoretically,  the  support  of  the 
poor  and  defective  classes  is  an  activity  conferring 
a  common  benefit  upon  all  the  other  members  of 
society,  and  hence  they  are  called  upon  to  contribute 
accordingly.  If  we  consider  it  the  moral  duty  of 
society  as  a  whole  to  help  the  weak,  then  the  relief 
of  the  poor  confers  a  common  benefit.  It  is  the  same 
if  we  look  upon  poor  relief  from  a  less  altruistic  point 
of  view,  and  consider  that  society  is  merely  protect- 
ing its  own  interest,  as,  for  example,  in  isolating  the 
feeble-minded,  so  that  they  shall  not  propagate  their 
weakness.  Without  going  farther  into  details  which 
will  receive  attention  later  in  the  book,  it  is  now  clear 
that  this  conception  provides  a  feasible  way  of  classify- 
ing public  activities  and  public  revenues.  When 
we  once  have  a  satisfactory  classification  of  revenues, 
it  is  easy  to  classify  debts,  inasmuch  as  they  rest 
upon  the  revenues.  The  administrative  features  of 
the  financial  bureaux  will  fall  naturally  into  place 
also. 

A  single  method  of   classification  will,  therefore, 
pervade  the  work  from  beginning  to  end  which  will 
help  us  to  get  at  the  economic  features  ^^y^^f^^e^ 
of  expenditures,   reveal  the  justification  of  this  dassi- 

1       ^  jication. 

and  measure  of  taxation,  and    show  us 

the  essential  character  of  each  kind  of  public  debt ; 

namely,    the    kind    of    credit    upon    which    it    is 

based. 

It  must  not  be  understood  that  the  assignment  of 
any  activity    to    a   particular   group  is  permanent. 


16  INTRODUCTION   TO  PUBLIC  FINANCE 

Activities  that  were  once  regarded  as  conferring 
The  attitude  special  benefit  —  as,  for  example,  a  large 
toward  pub-  part  of  the  administration  of  justice  — 
changes  A  come  in  time  to  be  regarded  as  of  common 
general  move-  benefit.     Such   changes   sometimes  pro- 

ment  toward  j        .,-,  .-,.,  j    j.i  j. 

the  idea  of  cced  With  rapidity,  and  the  stages  are 
common  not  passed  through  synchronously  by  all 

States.  There  are,  for  example,  many 
cities  which  let  private  individuals  provide  the  water 
supply.  Others  provide  it  themselves,  on  precisely 
the  same  terms  as  individuals  would,  while  others 
provide  it  much  as  they  do  other  special  privileges, 
regarded  as  conferring  both  special  and  common 
benefits ;  and  very  probably  the  time  is  near  when 
some  large  cities  will  regard  it  quite  as  much  a 
matter  of  common  benefit  to  provide  each  and 
every  citizen  with  at  least  a  certain  amount  of 
water,  paying  the  cost  out  of  funds  derived  from 
the  general  taxes,  as  they  now  regard  it  a  matter  of 
common  benefit  to  dispose  of  the  sewage,  a  function 
which  was  once  considered  the  duty  of  each  citizen, 
and  is  still  so  regarded  in  some  cities.  But  however 
mutable  our  classes  may  be,  they  are  clearly  discern- 
ible, and  it  is  generally  only  by  slow  degrees  that 
functions  move  from  one  end  to  the  other  of  the 
systematic  grouping. 

While  there  seem  to  be  general  tendencies,  which 
transfer  all  activities  from  the  special  benefit  to  the 
common  benefit  plan,  there  are  a  few  exceptional 
cases  where  the  movement  is  the  other  way.     The 


■J 


INTRODUCTION  17 

support  of  religion  is  such  an  instance.     Originally 
almost  the  sole  object  of  State  expendi-  someac«m- 
ture,  this  has  now,  after  passing  through  '^^«  cea.se  to 

,     ,  ,  6e  regarded  as 

various  ups  and  downs,  come  to  be  re-  of  common 
garded  as  of   such   special  benefit  that  &ene/i«. 
it  is  being  gradually  excluded  from  the  sphere  of 
the  State,  and  left  to  private  support.  • 


PART   I 

PUBLIC  EXPENDITURE 
CHAPTER   I 

THE   NATURE   OF   THE   STATE   AND   ITS   FUNCTIONS 

Section  1.  The  State  is  the  centre  of  public 
finance.  The  State  requires  money  and  services 
for  the  performance  of  its  functions.  ,  The  first 
question  is,  What  is  the  nature  of  the  State,  and  what 
are  its  functions?  To  answer  this  we  shall  have  to 
borrow  a  little  from  political  science.  The  best 
authorities  on  political  science  seem  to  answer  the 
question,  "  What  is  the  State  ? "  with  a  more  or 
less  expanded  but  not  essentially  modified  restate- 
ment of  Aristotle's  famous  dictum:  "It  is  manifest 
that  the  State  is  one  of  the  things  that  exist  by 
nature,  and  that  man  is  by  nature  a  political  ani- 
The  state  an  nial."  The  State  is  an  organism  into 
organism.  which  the  individual  is  born,  and  through 
which  alone  he  can  hope  to  reach  his  highest  devel- 
opment. Upon  its  existence,  and  the  perfection  with 
which  it  performs  its  functions,  depends  the  degree 

18 


CHAP.  I  THE  NATURE    OF  THE  STATE  19 

of  social  organisation  possible.  The  State  seems  to 
be  God-given  to  enable  society  to  organise  on  a  grand 
scale  for  the  accomplishment  of  practical  ends  far 
beyond  the  reach  of  the  individual, — ends  upon 
which  the  welfare  of  the  individual  depends. ^ 

The  two  opposing  theories  as  to  the  proper  sphere 
of  the  State,  Individualism  and  Socialism,  stand  for 
two  grand  truths.  The  one  for  the  truth  that  the 
individual,  if  he  is  to  accomplish  his  manifest  des- 
tiny, must  be  allowed  and  assured  rocm  enough  for 
the  free  exercise  of  his  powers  so  as  to  develop  them, 
and  to  expand.     Such  individual  devel-  ^  ^.  ._,    ,. 

*■  Individualism 

opment  is  necessary  for  the  advance  of  and  Socialism 
society.  The  second  is  that  the  State  ^«««^«^^"*'«- 
affords  the  individual  the  surest  means  of  obtaining 
the  assistance  of  his  fellows,  so  necessary  to  his  own 
complete  manhood.  The  way  of  reconciling  these 
two  theories  is  pointed  out  in  the  Christian  doctrine 
that  true  freedom  consists  in  perfect  obedience  to 
the  law.  Anything  short  of  perfect  obedience  to  the 
highest  law  is  failure  to  attain  the  highest  freedom. 
The  constant  intrusion  of  the  State  on  fields  of 
activity  previously  given  to  the  individ-  The  extension 
ual  is  a  natural  result  of  the  constant  ^^J^o^)^^^^ 
increase  in  the  separation  of  employ-  fiahieapnori. 
ments,  necessitating  more  extensive  organisation. 
As  the  individual  becomes  more  and  more  depend- 

1  Cf.  Kidd,  Social  Evolution;  for  detailed  analysis  of  the  nature 
of  important  modern  States  see  Burgess,  Political  Science  and 
Comparative  Constitutional  Law. 


20  INTRODUCTION   TO  PUBLIC  FINANCE     part  i 

ent  for  the  completeness  of  his  own  life  on  his 
fellows  and  their  faithful  performance  of  the  duties 
assigned  to  them,  the  organisation  of  the  State  be- 
comes correspondingly  more  perfect.  As  regards  this 
increasing  importance  of  organisation,  the  following 
will  fairly  summarise  the  practice  of  advanced  na- 
tioijs.  It  is  impossible  to  approve  on  a  priori  grounds 
of  every  intrusion  of  the  State  into  fields  hitherto 
set  aside  for  the  individual.  Only  when  such  in- 
trusion does  not  lessen  individual  power,  energy, 
ambition,  and  ability  to  advance,  is  it  permitted. 
And  only  when  it  promises  definitely  to  increase  the 
importance  of  the  individual,  in  the  long  run,  is  it 
desirable.  The  burden  of  proof  is,  therefore,  in  each 
concrete  case  thrown  upon  the  persons  who  would 
have  the  State  advance  into  new  fields.  There  is  no 
absolute  limit  to, 'but  only  a  general  presumption 
against,  the  assumption  of  new  functions  by  the 
State. 

Sec.  2.    If  political  science  cannot  in  the  nature 

of  things  give  us  any  definite,  theoretical  limits  to 

the  expansion  or  the  contraction  of  State  functions, 

can  such  limits  be  found  in  public  finance  ?     If  the 

common  statement  that  "  the  State  resfu- 

Does  public  ,        ^  ^  ^  ^ 

finance  set  lates  its  income  by  its  expenditure  and 
any  limit  to      ^^^   ^^g  expenditure   by  its  income"  is 

thepofisible 

expansion        altogether  true,  there  can  be  no  limit  set 

of  state  ^y  public  finance  to  the  possible  expan- 

sion  of  State  functions.     But  there  are, 

as  a  matter  of  fact,  many  important  exceptions  recog- 


CHAP.  1  THE  NATURE   OF  THE  STATE  21 

nised.i  Those  exceptions  are :  (1)  that  statesmen 
in  deciding  as  to  the  advisability  of  any  new  expen- 
diture necessarily  consider  the  amount  of  burden  it 
will  impose  on  the  taxpayers.  The  expansion  of 
municipal  activities  in  th5  last  twenty-five  years  has 
been  so  rapid  that  at  present  any  further  expansion 
is,  in  many  instances,  at  least  temporarily  checked 
by  the  difficulties  in  the  way  of  meeting  the  cost. 
(2)  There  are  some  instances  where  for  political 
reasons  income  has  outrun  what  was  regarded  as  wise 
expenditure,  and  new  ways  of  spending  have  had  to 
be  devised.  This  is  a  decidedly  more  unfortunate 
state  of  affairs  than  the  other,  for  such  forced  expen- 
diture seldom  takes  a  wise  direction.  Witness  the 
wholesale  plundering  of  the  United  States  treasury 
for  pensions.  (3)  Expenditures  may  sometimes  rise 
very  rapidly,  and  necessarily  so,  at  a  time  when  it 
would  be  extremely  unwise  to  attempt  to  increase 
the  revenues.  At  such  times  the  practice  of  nations 
—  a  practice  that  has  proven  itself  wise  —  has  been 
to  let  expenditure  run  beyond  the  income  and  borrow 
the  difference. 

One  of  the  prime  requisites  of  a  good  system  of 
public  revenues  is  thcvt  the  sums  taken  from  the 
people  each  year  in  the  various  ways  a  limit  set  by 
shall  be  as  steady  as  possible.  The  rea-  ^/'JIadi/?e'« 
son  for  this  will  be  made  clear  under  inrevenues. 
the  general  consideration  of  revenue.  That  fact, 
however,  forbids  our  determining  the  annual  reve- 
1  Cf.  Bastable,  p.  42 ;  Wagner,  I,  sec.  11. 


22  INTRODUCTION   TO  PUBLIC  FINANCE     part  I 

nues  absolutely  by  the  annual  expenditures.  The 
general  practice  of  nations  is  to  increase  expendi- 
ture, {a)  when  it  is  absolutely  necessary,  (5)  if  not 
absolutely  necessary,  when  it  offers  advantages  which 
more  than  compensate  for  the  increased  burden  on 
the  revenues.  The  experience  of  nations  has  also 
Practice  of  shown  that  it  is  universally  better  to  do 
nations  recog-  the  public  business,  if  expenses  are  in- 
creasing rapidly,  on  a  deficit  rather  than 
on  a  surplus.  If  expenses  are  for  a  considerable 
period  quite  uniform,  the  usual  policy  is  to  keep  the 
revenues,  as  nearly  as  possible,  equal  to  them,  but 
not  in  excess  of  them,  and  when  expenses  can  for 
some  reason  be  lessened,  some  of  the  revenues  may 
be  applied  to  the  amortisation  of  accumulated  defi- 
cits. It  would  seem,  then,  that  steadiness  of  reve- 
nue is  treated  as  the  more  important  consideration. 
Herein  lies  a  limit,  but  not  an  absolutely  fixed 
one,  to  the  expansion  of  expenditure  and  of  State 
functions. 

To  sum  up :  the  general  character  of  public  ex- 
penditure, especially  as  to  whether  imperative  or 
Summary  of  ^ot,  as  well  as  to  its  particular  direction, 
the  argument    ^^{\\   depend   primarily  upon   considera- 

as  to  the  limi-      .  .  ./        j. 

tation  of  state  tions  which  belong  to  political  science. 
/unctions.  j^^  amount  will  depend  on  the  revenue- 
yielding  strength  of  the  State,  and  upon  the  effect 
which  such  expenditure  will  have  thereon.  The 
danger  made  so  much  of  by  some  writers  ^  lest, 
1  Roscher,  sec.  109. 


CHAP.  I  THE  NATURE    OF   THE  STATE  23 

revenues  being  obtainable  by  compulsion,  that  com- 
pulsion be  exercised  for  the  benetit  of  interested 
persons,  who  gain  particularly  by  the  increased 
spending,  is  in  a  democracy  replaced  by  the  corre- 
sponding danger  lest  too  meagre  supplies  be  granted 
by  the  voters  who  must  themselves  pay  the  larger 
part  of  the  revenues,  and  advisable  or  even  neces- 
sary lines  of  expenditure  be  omitted  or  seriously 
curtailed. 

Sec.  3.  Expenditure,  like  every  other  feature  of 
public  finance,  changed  radicallj^  in  character  and 
direction  during  the  eighteenth  century.  Therefore, 
before  proceeding  to  analyse  present  expenditure, 
we  shall  do  well  to  take  a  brief  survey  of  expendi- 
ture before  this  century.  In  the  early  stages  of  State 
life  the  forms  of  property  were  few,  public  life  was 
identified  with  the  family  and  with  religious  life. 
There  was  little  call  for  definite  public  p^^i^ncez- 
expenditure.  The  chief  item  was  for  penditurein 
religious  observances,  and  for  these 
purposes  only  was  there  a  distinct  public  treasury. 
Foundations  for  the  support  of  religious  observ- 
ances, as  seen  in  Greece  and  Rome,  are  extremely 
old.  The  temples  have  their  own  groves,  lands, 
mines,  and  flocks,  receive  contributions,  and  collect 
payments  for  their  services.  Materials  for  the  study 
of  this  period  are  scant.  Services  of  a  public  char- 
acter are  performed  by  all  citizens  as  a  matter  of 
course.  In  war  they  are  the  warriors;  they  furnish 
their  own  arms.     Their  reward  is  in  the  success  of 


24  INTRODUCTION  TO  PUBLIC  FINANCE      part  1 

their  enterprise.  By  mutual  effort,  or  by  the  slave 
labour  of  conquered  peoples,  they  build  their  fortress- 
cities,  ships,  roads,  and  temples.  The  simplicity  of 
economic  life  and  the  absence  of  a  money  economy 
forbid  the  rise  of  any  proper  system  of  public  reve- 
nues. Taxes  are  levied  on  conquered  peoples,  but 
the  free  citizen  is  usually  exempt.  There  is  practi- 
cally no  division  of  labour  in  State  matters  w^hicli 
would  call  for  a  paid  public  service.  Greece  and 
Rome  emerge  from  these  primitive  forms  with  a 
more  complicated  system  of  expenditure,  but  with 
relatively  little  advance  in  revenues. 

Sec.  4.  In  Athens  we  find  a  highly  developed 
system  of  expenditures,  almost  communistic  in  char- 
Athenian  ex-  acter,  and  greater  than  that  of  other  na- 
penditure.  tions  of  Greece  on  account  of  the  sources 
upon  which  the  city  treasury  might  draw  and  the 
peculiar  circumstances  in  which  tlie  city  was  placed.^ 
The  expenditure  for  public  buildings  and  public 
works  was  particularly  large,  as  were  the  extrava- 
gances of  public  festivals  and  sacrifices,  of  donations 
to  the  people,  compensations  for  attending  the  as- 
semblies, and  the  like.  Peculiar  to  Athens,  among 
all  the  nations  of  that  era,  was  the  assistance  ren- 
dered at  the  public  expense  to  the  poor  and  especially 
to  the  children  of  those  fallen  in  war.  Regular  ex- 
penditures are  said  to  have  varied  from  400  to  1000 
talents,  or  from  1410,400  to  11,026,000.     Extraordi- 

1  The  outline  in  the  text  is  necessarily  very  brief  ;  for  a  longei 
account  see  Boeckh,  The  Public  Economy  of  the  Athenians. 


CHAP.  I  THE  NATURE    OF  THE   STATE  25 

nary  expenses  in  time  of  war  were  relatively  small 
on  account  of  the  rendition  of  voluntary  services  by 
the  citizens. 

In  Rome  there  was  no  distinct  public  budget  in  the 
earlier  days  of  the  republic. i  The  public  wealth 
was  not  distinct  from  the  private  wealth  of  the 
citizens.  With  the  increase  of  the  provinces  and  the 
receipt  of  tribute  from  them  came  regular  ExpemUhire 
methods  of  public  expenditure.  The  in  Rome. 
items  directly  borne  by  the  State  were  the  cost  of 
the  priesthood,  of  buildings  and  other  structures  and 
roads,  of  the  army,  of  the  general  administration, 
and  of  the  distributions  of  food,  of  grain  for  the  city 
population,  and  donations  of  money,  oil,  and  wine. 
The  army  was  first  paid  in  406  B.C.  But  for  a  long 
time  afterward  the  remuneration  amounted  to  little 
more  than  the  reimbursement  of  expenses.  At  first 
the  Emperor  was  supposed  to  live  from  his  own 
private  property,  but  as  he  had  control  of  all  the 
public  revenues,  the  distinction  was  difficult  to  main- 
tain.    The  later  courts  were  extremely  extravagant. 

Greek,  and  especially  Roman,  expenditure  had 
many  features  similar  to  modern  expenditure.  In 
classic  civilisation,  division  of  labour  was  sufficiently 
developed  to  render  possible  the  payment  of  those 
who  devoted  all  their  time  and  energy  to  Division  of 

J.    -,         1     labour  and 

public  affairs.     But  continuity  ot  devel-  p^^ncexpen- 
opment   is   lacking.      From  the   fall   of  diture. 
Rome  to  the  rise  of  feudalism  there  is  a  reversion 
1  See  Marquardt,  Bomische  Staatsverwaltung,  Bd.  II. 


26  INTRODUCTION   TO  PUBLIC  FINANCE     part    i 

to  the  earlier  forms  of  public  life.  Public  expendi- 
ture is  not  separable  from  private.  The  citizen 
serves  the  State  without  renumeration,  and  there 
are  no  public  expenses  proper. 

Sec.  5.  It  is  the  essence  of  feudalism  that  all 
governmental  functions  are  placed  in  the  hands  of 
officials  who  are  given  the  possession  of  lands  which 
yield  the  necessary  revenues  for  the  execution  of 
those  duties.  At  the  same  time  the  relation  be- 
tween these  rulers  and  the  people  is  such  that  ser- 
vices can  be  commanded  for  public  purposes  without 
distinct  remuneration.  The  undeveloped  condition 
of  commerce  and  industry  necessitates  that  public 
Feudal  ex-  Contributions  shall  be  in  products  and  in 
penditure.  services.  The  chief  duties  of  a  public 
character  that  are  performed  by  these  semi-public  of- 
ficials are  the  organisation  and  leadership  of  military 
operations  and  the  crude  administration  of  justice. 
Of  administrative  functions  in  our  modern  sense 
there  are  scarcely  any.  The  public  funds  are  so 
entirely  under  the  control  of  the  prince  that  he 
comes  to  regard  them  as  his  own.  At  the  same 
time  the  various  subordinate  lords,  who  were  origi- 
nally officers  of  the  crown  and  who  received  lands 
for  the  purpose  of  supporting  them  in  their  offices, 
succeed  in  retaining  possession  of  the  lands  and 
other  rights  and  privileges,  although  neglecting  the 
duties  for  which  they  were  given.  As  the  monarchi- 
cal State  emerges  from  feudalism  there  is  the  same 
complete  identification  of  the  public  purse  with  the 


CHAP.  1  THE  NATURE   OF   THE   STATE  27 

private  purse  of  the  monarch  as  there  was  of  the 
State  with  the  person  of  the  monarch.  And  this, 
too,  although  a  good  share  of  the  revenues  are  now 
derived  from  taxation.  Expenditure  is  for  the  grati- 
fication of  the  prince,  and  so  far  as  he  sees  that  his 
interest  ia  the  same  as  that  of  his  people  he  spends 
for  them. 

The  advance  of  constitutional  forms  of  government 
ip  everywhere  characterised  by  successful  attempts 
on  the  part  of  the  representatives  of  the  constuution- 
people,  or  of  those  who  contribute  to  the  (^U'orms  of 

1     p    1      r.  government 

public  purse  to  get  control  of  the  nuances,  'change  the 
Constitutionalism  advances  just  as  fast  as  control  of  ex- 

penditure  and 

it  succeeds  in  these  attempts.  At  present  consequently 
the  control  of  the  purse  is  entirely  in  the  Us  character. 
hands  of  the  constitutional  legislative  bodies  in 
almost  all  civilised  countries,  and  the  domains  of  the 
prince,  which  were  originally  given  him  by  the  people 
in  order  that  he  might  be  supported  in  proper  dignity 
in  the  performance  of  his  public  duties,  and  were  then 
diverted  by  him  to  his  private  enjoyment,  have  been 
regained  in  many  cases  by  those  who  gave  them,  arid 
are  in  most  States  once  more  public  property.  The 
expenditure  for  the  support  of  the  crown  now  be- 
comes one  of  the  chief  items  on  the  civil  list.  The 
final  establishment  of  constitutional  government  has 
introduced  a  new  criterion  for  judging  public  ex- 
penditure. An  expenditure  is  no  longer  a  justifiable 
one  when  it  gratifies  the  whim  of  the  ruler  of  the 
governing   body,  but  it  must  result  in   some   clear 


28  INTRODUCTION   TO  PUBLIC  FINANCE     part  1 

benefit  to  the  people  as  a  whole,  or  to  the  nation,  oi 
in  a  benefit  that  is  so  regarded  ;    otherwise  it  will 
not   continuously  meet  with   the   popular   approval- 
which  is  now   necessary  to  sanction   every  govern- 
mental action. 

Sec.  6.  Many  attempts  have  been  made  to  clas- 
sify public  expenditures,  and  often  with  good  results. 
The  most  common  are  those  which  follow,  more  or 
less  closely,  the  usual  economic  analysis  of  private  ex- 
penditure, according  as  the  wants  satisfied  are  neces- 
Necessary,  sary,  desirable,  or  superfluous.  The  use 
desirahie,or     ^^  economic  terms  in  this  way  is  to  be 

superfluous  *' 

expenditure,     commended,    but    as    in    economics,     so 

here,  the  vagueness  and  relativity  of  these  terms 
are  very  unsatisfactory.  Different  writers  do  not 
agree  as  to  what  are  necessaries,  even  for  the  same 
State.  After  all,  the  assignment  of  any  particular 
expenditure  to  one  or  the  other  of  these  categories 
is  merely  the  expression  of  the  author's  individual 
judgment  on  the  expenditure  in  question. ^  Pro- 
Bastabie's  fcssor  Bastable,  realising  this  difficulty, 
ciussification.  proposes  a  classification  based  on  the  or- 
der of  historical  rise  of  the  different  functions,  or 
perhaps  it  would  more  nearly  reproduce  his  thought 
to  say  that  he  tries  to  establish  historically  a  sort  of 
natural  evolution  or  sequence  of  public  expenditures. 
Such  a  classification  is  useful,  for  the  purpose  of 
historical  treatment,  but  even  there  it  presents  many 
difficulties.  The  difficulties  arise  from  the  fact  that 
iCf.  Bastable,  p.  43. 


CHAP.  I  THE  NATURE    OE  THE   STATE  29 

such  a  process  merely  substitutes  for  the  author's 
judgment,  on  which  the  older  classifications  rest, 
the  judgment  of  the  leaders  of  national  policy  at 
different  times  and  in  different  places  on  the  same 
questions :  namely.  Are  these  expenses  necessary  or 
merely  expedient?  He  certainly  gains  much  by 
substituting  the  point  of  view  of  past  statesmen  for 
that  of  any  present  person  or  persons.  But  for  pur- 
poses of  exposition  it  will  be  a  still  greater  gain  if 
we  can  eliminate  the  personal  element  entirely  and 
make  a  classification  that  does  not  depend  upon  the 
way  in  which  the  desirability  or  undesirability  of 
the  different  functions  is  regarded. 

Such  an  analysis  as  we  are  in  search  of  has  been 
suggested  by  Professor  Cohn,i  which   he   has   well 
called  the   "economic  analysis    of   civic   Cohn'seco- 
housekeeping."     There  are,"^  according  to  ^7^««^«««^> 

^     o  '  t3  cation  of  CIVIC 

this   suggestion,   four   groups.       The   first    housekeeping. 

consists  of  those  functions  which  confer  so  definite  a 
benefit  upon  the  individual,  and  are  so  clearly  per- 
formed solely  for  the  benefit  of  the  individual,  that 
he  would  naturally  be  expected  to  meet  the  cost  of 
them.  The  second  group  consists  of  those  functions 
which  confer  a  common  benefit  upon  all  members  of 
the  State,  of  such  a  character  that  it  cannot  be  par- 
celled out  and  each  portion  definitely  assigned  to 
the  respective  members.  This  group  embraces  the 
prime  functions  of  the  fundamental  institutions  of 
the  State.  These  are  the  two  extremes.  Between 
1  Finanzwissenschaft,  p.  117. 


30  INTRODUCTION  TO  PUBLIC  FINANCE      part  \ 

them  are  two  more  groups.  The  third  consists  of 
those  functions  which  confer  a  special  benefit  that 
might  be  separately  assigned  to  particular  persons, 
but  in  which  such  assignment  is  wholly  or  partly 
waived,  because  there  is  also  sufficient  common 
benefit  to  justify  making  su6h  functions  a  total  or 
partial  charge  on  the  general  ability.  Finally,  a 
fourth  group,  which  consists  of  those  functions  that 
confer  a  special  benefit  on  certain  individuals  more 
or  less  unable  to  assist  in  bearing  the  charges,  and 
which  are  consequently  treated  as  though  they  con- 
ferred a  common  benefit  upon  all  the  members  of 
society. 

Dropping,  for  the  present,  all  consideration  of  the 
ways  in  which  the  benefit  is  measured, 

The  four  which  will  be  fully  discussed  under  the 

classes  of  ex-      ,        ,        »  ,  •  .i 

penditures  nead.  01  revenue,  ana  rearranging  the 
according  to  groups  in  the  order  of  their  importance, 
conferred.  we  have  the  following  four  classes  of  ex- 
penditures: 

First,  the  largest  and  most  important,  those  which 
confer  a  common  benefit  on  all  citizens. 

Second,  those'  which  confer  a  special  benefit  on 
certain  classes  that  is  treated  as  a  common  benefit, 
because  of  the  incapacity  of  these  classes. 

Third,  those  which  confer  both  a  special  benefit 
on  certain  persons  and  a  common  benefit  on  all  the 
others. 

Fourth,  those  which  confer  only  a  special  benefit 
on  individuals. 


CHAP.  I  THE   NATURE    OE  THE  STATE  31 

Under  the  first  of  these  come  the  general  expendi- 
tures for  the  support  of  the  constitutional  agencies 
of  the  government.  The  support  of  the  ad- 

.  .  1  1       .  1  ^^  iUm»  be- 

mimstrative  and  legislative  departments,  longim/  to 
in  almost  all  their  branches,  including  ^"^'^  ^^^^'^' 
the  diplomatic  corps,  and  everything  necessary 
thereto,  as  public  buildings,  etc.  Here,  too,  be- 
long the  support  of  defence  and  the  maintenance 
of  internal  security  and  quiet.  Here  belong,  ac- 
cording to  modern  practice,  the  maintenance  of 
roads,  although  it  was  once  treated  as  belonging 
to  class  four,  and  passed  through  a  transition  stage 
in  class  three.  Under  this  class  belong  also  the 
chief  expenses  in  connection  with  the  maintenance 
of  the  money  circulation,  although  a  part  of  this 
expenditure  is  in  most  countries  to  be  assigned  to 
class  three. ^  The  same  is  to  be  said  of  the  ex- 
penditure for  education.  Here  belong  the  adminis- 
trative control  and  assistance  of  private  industry 
and  commerce. 

Under  class  two  belongs  the  care  of  the  poor 
and  the  defective.  Also  the  support  of  the  pen- 
sioned, unless  the  pensions  are  such  that  they 
may  be  regarded  as  wages  delayed  in  payment,  in 
which  case  they  belong  to  the  first  class. 

Under  class  three  come  the  administration  of 
justice,  the  provision  for  religion  wherever  the 
State  has  an  established  church,  tiie  general  admin- 

1  The  United  States  once  charged  a  seigniorage  of  one-fifth  per 
cent. 


32  INTRODUCTION   TO  PUBLIC  FINANCE      part  i 

istration  of  the  postal  service  (sometimes,  however, 
this  is  in  class  four),  the  administration  of  special 
rights,  like  patent  rights,  copyrights,  corporatior 
privileges,  etc.  ;  also,  the  recording  of  titles,  etc. 
the  laying  out  and  grading  of  streets,  building  o 
sewers,  etc. ;  so,  also,  the  water-supply  in  man^ 
cities,  although  the  provision  for  this  is  rapidl} 
undergoing  a  development  that  will  eventually 
place  it  in  class  one. 

To  class  four  belong  almost  all  of  the  great  in 
dustries  carried  on  by  the  State  or  by  cities,  th( 
monopolies  maintained  by  them  for  the  benefit  o: 
their  treasuries,  etc. 

As  will  be  seen  from  remarks  made  above  ir 
connection  with  the  assignment  of  certain  of  thes( 
services  to  the  different  classes,  there  has  been,  anc 
still  continues,  a  certain  process  of  evolution  which 
may  be  generally  summed  up  as  a  tendency  for  al" 
these  expenditures  to  move  from  class  four  to  class 
one.  There  are  many  instances  where  expendi- 
tures now  regarded  as  naturally  and  unchangeably 
belonging  to  class  one  were  regarded  as  belonging 
to  class  four.  When  a  government  assumes  an;y 
new  industrial  function,  as,  for  example,  supplying 
water  to  the  inhabitants  of  a  city,  that  function  is 
usually  assigned  at  first  to  class  four  and  treated  as 
though  conferring  a  special  benefit  only.  But  it 
frequently  comes  about  that  it  is  regarded  as  a  func- 
tion conferring  a  common  benefit  at  least  in  part, 
and  passes  into  class   three.     There   are   forces   at 


CHAP.  I  THE  NATURE   OF  THE  STATE  33 

work  which  seem  likely  to  place  it  finally  in  class 
one.  In  the  case  of  highways  this  transition  has 
been  completely  made,  and,  except  in  the  case  of 
city  streets,  which  still  belong  to  class  three  so  far 
as  construction  is  concerned,  but  pass  into  class  one 
as  soon  as  finished,  highways  are  usually  treated  as 
conferring  common  benefit  only. 

In  the  following  chapters  on  expenditure  the  order 
indicated  above  will  be  followed.  The  arrangement 
of  the  different  expenditures  under  class  one  will  be 
somewhat  according  to  historical  origin  and  impor- 
tance. 

APPENDIX 

THE   OFFICIAL  CLASSIFICATION  OF  EXPENDITURES 
BY   THE   UNITED   STATES  CENSUS  BUREAU 

The  United  States  Census  Bureau  undertook,  in  1902,  to  formu- 
late a  general  classification  of  governmental  expenses  and  revenues. 
This  classification  was  constructed  primarily  for  the  purpose  of 
presenting,  in  a  uniform  and  systematic  manner,  the  statistics  of 
municipal,  comraonv^realth,  and  national  finance  in  the  United 
States,  which  it  is  the  duty  of  the  bureau  to  compile.  It  was  more 
especially  designed  for  the  biennial  reports  on  municipal  finances. 
A  secondary  purpose  was  to  influence  the  many  accounting  oflticers 
to  adopt  a  uniform  and  improved  method  of  keeping  their  accounts. 
The  classification  is  the  work  of  the  Hon.  L.  G.  Powers,  one  of  the 
able  chief  statisticians  connected  with  the  bureau,  who  took  the 
advice  of  a  number  of  expert  accountants  and  of  some  committees 
of  the  learned  societies  interested  in  the  subject.  The  classification 
has  stood  the  severe  test  of  having  been  applied  to  the  analysis  and 
presentation  of  the  expenditures  of  a  multitude  of  cities  and  of  the 
fifty-one  states  and  territories  of  the  United  States.  It  has  thus 
been  proven  to  be  a  practical  system,  and  is  worthy  of  careful 
study.    It  should  be  noted,  that,  although  all  the  cities  and  sta'cs 


34  INTRODUCTION   TO  PUBLIC  FINANCE      part  i 

to  which  this  classification  has  been  applied  are  in  the  United 
States,  and  might  therefore  be  supposed  to  present  a  set  of  financial 
systems  with  many  points  in  common,  yet  there  are  so  many 
differences  arising  from  local  traditions  and  differing  conditions 
that  the  classification  has  stood  a  test  almost  as  severe  as  if  it  had 
been  applied  to  the  analysis  of  the  expenses  of  foreign  govern- 
ments. 

The  following  extracts  are  from  the  Special  Report  of  the  Census 
Bureau  on  Wealth,  Debt,  and  Taxation  (twelfth  census),  1907,  pp. 
953  ff.  All  references  to  the  classification  of  revenues  have  been 
omitted  here  as  they  are  appended  to  Chapter  I,  in  Part  II. 

"Basis  of  Classification 

"  The  most  fundamental  of  the  many  classifications  of  expenses, 
outlays,  revenues,  payments,  and  receipts  of  governments  is  that 
according  to  the  nature  of  the  governmental  activities  and  transac- 
tions with  which  associated.  From  the  standpoint  of  the  student 
of  economics  the  activities  and  transactions  of  a  nation,  state,  or 
municipality  are  of  two  radically  different  types;  these  are  here 
classified  as  arising  from  general  functions  and  from  commercial 
functions. 

"The  general  functions  of  a  nation,  state,  or  municipality  are 
those  which  are,  as  a  rule,  performed  for  all  citizens  alike,  without 
any  attempt  to  measure  the  amount  of  benefit  conferred  or  the 
exact  compensation  therefor,  the  expenses  being  met  by  revenues 
obtained  principally  from  compulsory  contributions  levied  without 
regard  to  the  benefits  which  the  individual  contributors  may  derive 
from  any  or  all  governmental  activities.  Most  functions  of  this 
class  are  essential  to  the  existence  and  development  of  government 
and  to  the  performance  of  the  governmental  duty  of  protecting  life 
and  property  and  of  maintaining  a  high  standard  of  social  efl&ciency . 
Chief  among  such  activities  are  those  of  general  government ;  the 
protection  of  life,  health,  and  property ;  the  care  of  the  defective, 
delinquent,  and  dependent  classes;  the  education  of  the  young, 
and  the  performance  of  other  duties  of  a  similar  nature ;  the  pur- 
chase of  lands  for  government  buildings,  parks,  and  streets ;  the 
erection,  equipment,  and  management  of  state  capitols,  county 
court  houses,  city  halls,  and  other  buildings  for  general  govern- 
mental uses;  and  the  purchase  or  construction  and  operation  of 
electric  light  and  gas  works  for  the  exclusive  purpose  of  lighting 


CHAP.   I  THE  NATURE    OF   THE   STATE  35 

the  streets  and  governmental  buildings,  and  of  other  structures  and 
plants,  such  as  printing  offices,  police  and  fire  telephone  systems 
and  bridges ;  for  furnishing  free  of  charge  any  commodity  or 
service  required  by  the  government  in  the  common  interest  of  all 
its  citizens.  In  the  same  category  are  included  the  opening, 
grading,  paving,  and  curbing  of  streets,  and  the  construction  of 
drains  and  sewers,  where  such  public  improvements  are  made  at 
public  expense,  without  conferring  upon  particular  individuals 
measurable  special  benefits  for  which,  in  the  opinion  of  the  proper 
authorities,  compensation  should  be  exacted  by  the  government. 
To  the  same  group  belong  the  making  and  paying  of  loans  and  the 
payment  of  interest  thereon,  where  such  loans  are  made  in  connec- 
tion with  other  activities  and  transactions  mentioned. 

"  The  general  functions  of  nations,  states,  and  municipalities 
may  be  classified  in  a  great  variety  of  ways,  according  to  the  point 
of  view  from  which  considered.  The  primary  classification  of 
general  functions  of  municipalities  which  was  adopted  by  the  Bureau 
of  the  Census  is  based  upon  prior  studies  of  the  subject  by  Professor 
AdolphWagner,  of  Germany,  set  forth  in  his  F««a?i^tomensc^a[/(f,  and 
reviewed  by  Pro t'essor  Frederick  R.  Clow  in  the  Quarterly  Journal 
of  Economics  for  July,  1896.  The  earlier  treatment  of  the  subject 
by  American  economists  was  ably  discussed  by  Professor  L.  S.  Howe 
of  the  University  of  Pennsylvania,  before  the  conference  of  the 
National  Municipal  League  in  1899.  As  a  result  of  these  studies 
and  of  conferences  between  accountants,  economists,  and  others 
connected  with  the  National  Municipal  League,  that  organisation 
arranged  a  tentative  classification  which  was  made  the  basis  of 
the  one  later  adopted  by  the  Bureau  of  the  Census  and  used  in  its 
statistics  of  municipal  finance  in  Bulletins  20,  45,  and  50. 

"  The  commercial  functions  of  a  nation,  state,  or  municipality 
include  those  which  create  trade  relations,  industrial  or  semi-in- 
dustrial, between  the  nation,  state,  or  municipality  and  the  general 
public,  including  other  civil  divisions.  Among  the  transactions 
which  arise  from  the  exercise  of  such  functions  are  those  involving 
the  loan  of  public  money  at  interest,  the  use  of  public  property  for 
compensation,  the  sale  of  any  commodity  or  article  of  commerce, 
or  the  performance  of  any  work  or  service  for  pay.  All  these 
transactions  involve  the  performance  of  some  service  by  the 
national,  state,  or  municipal  government,  or  the  granting  of  some 
favour  by  such  government,  for  special  compensation,  whether  the 
service  or  favour  be  primarily  for  this  service  or  favour,  or  for  the 


36  INTRODUCTION  TO  PUBLIC  FINANCE      part  ^. 

revenue  to  be  secured  ;  none  of  them  is  essential  to  the  existence 
and  development  of  the  government,  though  they  may  be  made  to 
contribute  to  its  support. 

"  Commercial  functions  together  with  the  commercial  and  semi- 
commercial  transactions  which  arise  from  them  may  be  grouped 
into  three  subclasses  —  industries,  investments,  and  special  services. 

"  (1)  Industries  are  those  activities  of  nations,  states,  and  mu- 
nicipalities—  as  the  United  States  postal  service,  the  national  rail- 
roads of  many  European  nations,  the  liquor  dispensary  of  South 
Carolina,  and  such  municipal  activities  as  waterworks,  electric  light 
and  gas  works,  and  street  railways  —  which  are  organised  as  more 
or  less  complete  departments  or  offices  of  cities  for  the  purpose  of 
furnishing  economic  utilities  to  individual  citizens,  or  to  other  civil 
divisions,  on  terms  involving  such  a  compensation  as  may  be  deter- 
mined by  consideration  of  public  policy.  Such  activities  of  cities 
are  generally  referred  to  by  British  writers  as  municipal  trading. 
Those  of  nations,  states,  and  municipalities  are  also  frequently 
called  quasi-private  industries  or  enterprises.  As  economists  use 
the  term,  a  quasi-private  industry  or  enterprise  of  a  nation,  state,  or 
municipality  is  one  in  which  the  purpose  of  realising  a  net  income 
or  profit  controls  the  method  of  management  and  determines  the 
charges,  as  in  a  private  business  of  similar  character.  In  this 
strict  sense  of  the  term  there  are  few  if  any  quasi-private  industries 
or  enterprises  in  the  United  States,  the  greater  number  of  national, 
state,  and  municipal  industries  established  in  America  having  been 
called  into  existence  solely  or  principally  to  promote  the  welfare  of 
the  citizens.  Hence  the  Bureau  of  the  Census  uses  the  term  '  in- 
dustries '  to  include  not  merely  those  properly  designated  as  quasi- 
private,  as  defined  above,  but  all  departments,  offices,  or  activities 
organised  by  nations,  states,  and  municipalities  to  furnish  utilities 
to  their  citizens  for  a  compensation,  without  exclusive  regard  to  the 
question  of  profit. 

"  (2)  \]n'3i%v  investments  are  included  all  transactions  of  national, 
state,  and  municipal  governments  connected  with  the  purchase, 
sale,  or  possession  of  real  property  or  securities  held  exclusively  for 
investment  purposes,  and  the  loan  of  public  money  to  individuals, 
corporations,  or  other  civil  divisions.  Such  transactions  are  of  two 
classes :  First,  those  of  the  sinking,  investment,  and  public  trust 
funds  in  which  or  through  which  the  nation,  state,  or  municipality 
invests  money  for  the  sole  purpose  of  deriving  interest,  rent,  or  other 
income  therefrom  ;  second,  the  transactions  of  a  more  temporary 


CHAP.  I  THE  NATURE   OF  THE   STATE  37 

character  by  which  the  national,  state  or  municipal  government 
receives  interest  on  current  cash  deposits  and  on  deferred  payments 
of  taxes  and  special  assessments. 

"  (3)  Special  services  include  all  activities  and  transactions  other 
than  those  included  in  (1)  and  (2),  which  are  engaged  in  by  na- 
tions, states,  or  municipalities  in  the  interest  of  the  general  public, 
but  which  confer  measurable  special  benefits  —  or  what  are  arbitra- 
rily so  regarded  —  upon  particular  persons,  natural  or  corporate, 
for  which  compensation  is  exacted.  These  services  include  the 
opening  of  highways  ;  the  construction  of  pavements,  sidewalks, 
drains,  and  sewers  ;  the  sprinkling  of  streets,  and  similar  services, 
the  payments  for  which  are  forced  by  means  of  special  assessments. 
In  the  same  category  belong  also  all  services  or  special  benefits  ren- 
dered to  private  individuals  or  to  other  civil  divisions  under  legal 
regulations,  and  paid  for  by  fees,  charges,  rents,  privilege  rehtals, 
and  kindred  remunerations.  ^ 

"  It  should  be  noted  that  special  services,  as  above  defined,  are 
always  performed  or  rendered  in  addition  and  incidental  to  the 
regular  work  of  the  various  departments  and  offices.  Receipts 
therefrom  are  always  classified  according  to  the  office  or  depart- 
ment rendering  the  service,  since  the  corresponding  expenses 
cannot,  save  in  rare  instances,  be  fully  separated  from  the  other 
expenses  of  such  department,  office,  or  industry. 

"Expenses 

"  Government  expenses  and  revenues,  when  classified  by  the  gov- 
ernmental functions  with  which  they  are  associated,  are  primarily 
arranged  in  groups  to  which  are  given  the  designations  '  General ' 
and  '  Commercial.' 

'^General  expenses.— The  general  expenses  of  nations,  states, 
and  municipalities  are  those  incurred  by  their  governments  in  con- 
nection with  the  exercise  of  their  general  functions.  These  ex- 
penses and  the  payments  thereof  are  subdivided  according  to  the 
office  or  department  on  whose  account  they  are  incurred. 

"  Commercial  expenses.  —  The  commercial  expenses  of  nations, 
states,  and  municipalities  are  those  incurred  by  their  governments 
in  connection  with  the  exercise  of  their  commercial  functions. 
They  are  divided  into  three  groups,  corresponding  to  the  three  sub- 
divisions of  commercial  transactions. 

"  (1)  Industrial  expenses  are  the  total  costs  of  the  operation  and 
maintenance  of  the  industries  of  a  nation,  state,  or  municipality, 


38  INTRODUCTION   TO   PUBLIC  FINANCE      part  i 

including  the  cost  of  materials  used  and  the  interest  on  loans  made 
specifically  for  such  industries. 

"  (2)  Investment  expenses  are  the  total  cost  of  administration  of 
the  sinking,  investment,  and  public-trust  funds  of  a  nation,  state, 
or  municipality,  including  the  interest  paid  on  loans  made  for  se- 
curities or  properties  purchased  for  those  funds. 

"  (3)  Special-service  expenses  are  the  expenses  incurred  by  a 
nation,  state,  or  municipality  in  connection  with  special  services 
performed  or  provided  by  any  of  its  departments  or  offices  other 
than  an  industry,  including  the  interest  on  loans  which  are  to  be 
met  from  the  proceeds  of  special  assessments." 


CHAPTER  II 

EXPENDITURE    EXCLUSIVELY    FOR    THE    COMMON 
BENEFIT 

Section  1.  In  this  chapter  we  shall  consider  ex- 
penditure of  the  first  class  ;  that  is,  expenditure 
treated  by  the  government  as  so  clearly  jvre«  expen- 
for  the  good  of  all  that  no  special  charge  (^^^^re. 
is  made  upon  any  of  the  individuals  incidentally 
benefited.  From  one  point  of  view  expenditure  of 
the  second  class,  wholly  for  the  benefit  of  certain 
persons,  who  are,  however,  exempt  from  any  special 
payments,  the  expense  being  treated  as  involving 
only  common  benefit,  is  sufficiently  like  that  of  class 
one  to  come  under  the  heading  of  this  chapter.  But 
it  has  been  made  a  part  of  the  next  chapter  in  order 
not  to  lengthen  this  one  unduly.  Both  of  these  ex- 
penditures might  well  be  called  net  expenditures 
in  distinction  from  those  which,  unlike  them,  de- 
velop some  accompanying  revenues. 

The  first  item  is  that  for  general  administration. 
Administrative  expenditure  is  for  the  support  of 
those  officers  of  the  government  who  Administra- 
nave  to  do  with  civil  artairs.  i^  or  con-  t^re,  the  civil 
venience  it  is  best  to  limit  it  to  those  list. 
officers  whose  functions  are  absolutely  indispensable 
to  the  execution  of  the  laws.     The  officers  who  will 

30 


40  INTRODUCTION   TO  PUBLIC  FINANCE      part  \ 

be  included  vary,  from  country  to  country,  with  the 
frame  of  the  government.  It  has  been  customary 
for  financial  writers,  following  the  lead  of  the  camer- 
alists,  to  limit  their  discussion  of  this  expenditure 
to  that  for  the  crown  and  court.  This  is,  in  Eng- 
land, called  the  civil  list.  "  The  peculiar  character  of 
such  expenditure  in  monarchical  countries  makes  it 
advisable  to  isolate  it.  But  it  must  be  borne  in  mind 
that  in  republican  countries  there  is  no  correspond- 
ing expenditure.  The  salaries  of  the  highest  execu- 
tive officials  in  republics  are  of  the  same  character  as 
those  of  the  ministerial  officials  in  monarchies.  In 
England  the  civil  list  for  his  Majesty's  privy  purse, 
household,  charities,  etc.,  amounts  to  £470,000,  and 
if  we  add  the  annuities  paid  to  members  of  the  royal 
family  amounting  to  £48,000,  the  crown  may  be  said 
to  cost  Great  Britain  nearly  12,600,000  per  annum. ^ 
In  most  monarchical  countries  these  expenses  were 
originally  met  by  the  revenues  from  the  crown  es- 
tates. But  the  revenues  from  the  domains  having 
been  absorbed  by  the  general  treasury,  it  became 
necessary  to  make  provision  for  the  civil  list  from 
the  general  revenues.  To  the  civil  list  should  be 
added  the  salaries  and  other  expenses  of  the  minis- 
tries, their  clerks,  secretaries,  etc.  In  federal  gov- 
ernments the  administrative  departments  of  the 
component  parts  or  commonwealths,  as  well  as  that 
of  the  central  government,  should  be  included. 
Finally  there  are  the  administrative  departments  of 
1  These  figures  refer  to  1908. 


CHAP.  II      EXPENDITURE  FOR    COMMON  BENEFIT      41 

the  local  governments.  It  is  very  difficult  to  ascer- 
tain  the  number  of  such  officials  and  almost  impossi- 
ble to  ascertain  all  such  expenses.  According  to  the 
summary  by  the  census  bureau  the  cost  of  all  the 
executive  departments  of  the  United  States  was 
$16,375,160  in  1902.  This  includes  federal,  common- 
wealth, and  local  executive  departments. 

In  monarchical  governments,  and  to  a  certain  ex- 
tent  also    in    republican    governments,    traditional 
sentiment  demands  that  the  head  of  the  Expenditure. 
government   shall   hold  a  social  position  ^.^^J*«^«"/^ 

°  ^  list  largely 

of  great  prominence  and  perform  certain  ornamental. 
merely  ornamental  functions,  involving  considerable 
expenditure.  So  that  the  expenditure  for  the  ser- 
vices of  the  highest  officials  is  often  larger  than  the 
sums  which  would  be  necessary  to  obtain  merely 
efficient  service.  This  lavish  expenditure  may  be 
fully  justified  on  political  grounds,  but  as  it  involves 
great  waste,  both  directly  and  indirectly,  by  example, 
it  cannot  be  justified  on  economic  or  fiscal  grounds. ^ 
It  is  a  general  fiscal  principle,  applicable  as  well  to 
this  part  of  expenditure  as  to  any  other,  that  the  ex- 
penditure should  not  be  larger  than  is  necessary  to 
secure  the  most  efficient  service.  The  justification 
of  this  lavishness,  therefore,  must  be  found,  if  any- 
where, in  the  creation  of  some  equal  utility  recognised 
by  political  science.  The  exceptions  made  in  prac- 
tice to  the  general  rule  of  economy  do  not  extend  be- 
yond the  heads  of  the  administrative  departments. 
1  Rau,  FinanzwisspMScha/t,  sec.  48. 


42  INTRODUCTION   TO  PUBLIC  FINANCE      part  i 

In  the  subordinate  positions  the  remuneration  does 
not  generally  exceed  and  is  often  below  that  which 
Saving  in  the  must  be  paid  for  similar  services  in  pri- 
lowerhranches  ^^^^   y^iQ.     Indeed,   there   is   a    certain 

of  the  admin- 
istration, saving,  in  that  many    of    the    positions, 

especially  where  the  tenure  of  office  is  secure  for  a 
relatively  long  period,  can  be  filled  at  a  lower  cost 
than  the  same  services  command  elsewhere,  on  account 
of  the  honour  attaching  to  them.  In  those  coun- 
tries where  the  expenditure  for  the  higher  positions 
is  largest  much  is  saved  by  the  lower  pay  attaching 
to  subordinate  positions. 

In  this  connection  mention  may  be  made  of  the 
diplomatic  and  consular  service,  which,  while  partly 
^.  ,  conducive  to  the  better  performance  of 

Diplomatic  ^ 

andconsviar  other  functions,  as,  for  example,  defence 
service.  ^^^   ^1^^  regulation  of  commerce,  is  yet 

properly  considered  to  be  subordinate  to  the  execu- 
tive departments.  Here  again  the  traditional  opinion, 
that  the  dignity  of  the  nation  can  only  be  properly 
sustained  by  a  lavish  expenditure  on  the  part  of  the 
ambassador  or  minister,  imposes  on  the  treasury 
burdens  far  greater  than  the  value  of  the  services 
rendered,  if  measured  by  the  ordinary  business 
standards.  As  the  means  of  communication  improve 
and  the  general  efficiency  and  reliability  of  the  news 
agencies  of  the  public  press  grow,  it  becomes  harder 
and  harder  to  justify  this  extravagance  even  on 
political  grounds.  The  custom  of  lavish  expenditure 
for  diplomatic  services  has  not  been  carried  to  such 


CHAP.  II     EXPENDITURE  FOR    COMMON  BENEFIT      43 

extremes  by  the  United  States  as  by  other  countries. 
As  these  positions  were  formerly  more  or  less  of  the 
nature  of  political  prizes,  in  that  country,  this  has 
probably  been  to  the  improvement  of  the  service. 
Foreign  intercourse  cost  the  United  States  11,583,118, 
in  1894,  and  $3,204,522  in  1902,  an  increase  due  to 
the  greater  importance  of  her  foreign  relations  since 
the  Spanish  War,  while  Great  Britain  paid  .£531,392, 
or  $2,585,753,  in  1804,  and  only  £490,052,  or  about 
$2,450,000,  in  1902,  for  that  service,  not  including 
colonial  services  of  practically  the  same  character, 
which  would  bring  the  amount  in  1902  up  to  over 
£1,000,000.  Generally  speaking,  the  executive  de- 
partment costs  comparatively  little  outside  of  the 
actual  salaries.  There  are  some  election  and  similar 
incidental  expenses,  but  not  many. 

To   the   administrative    department    belongs    the 
expenditure  for  the  collection  of  the  revenues.     Al- 
though this  is  a  part  of  the  gross  expen-   ^^^  ^^^^   , 
ditures  only,  it  is  properly  included  in  the  collecting  the 
general  accounts  so  as  to  render  control 
possible.     In  1908  England  spent  on  the  collection 
of  the  customs  duties  Xl,050,832,  on  that  of  the  in- 
land revenues  £2,416,000,  on   the  post-office   gains 
£17,592,854  ;  the  cost  of  collecting  the  total  revenues 
of  about  £154,000,000  is  about  £22,000,000  or  about 
fourteen  per   cent.     This  seems  an  extraordinarily 
large  deduction,  but  the  amount  is  large  because  of 
the  large  amount  of  expenses  connected  with  the  rela- 
tively small  returns  of  the  post-office  and  the  deficits 


44  INTRODUCTION   TO  PUBLIC  FINANCE     part  i 

of  the  telegraph  and  some  other  services.  The  cost 
of  collecting  customs  is  only  a  little  over  three  per 
cent,  of  collecting  the  inland  revenues  less  than  two 
and  one-half  per  cent.  In  the  United  States  the 
cost  of  collecting  the  customs  duties  was  about  three 
per  cent  in  1893,  and  five  per  cent  in  1894.  The 
receipts  fell  off  in  that  period  from  8200,000,000  to 
8130,000,000,  but  the  expenses  did  not  fall  oif  cor- 
respondingly. The  cost  of  collecting  the  internal 
revenues  in  1893  was  about  two  and  one-half  per  cent, 
in  1894  it  was  about  three  per  cent.  In  1906  the 
customs  revenues  were  8300,251,877,  and  the  cost  of 
collection  very  nearly  three  per  cent.  In  the  same 
year  the  internal  revenue  was  8249,150,212,  which 
cost  one  and  three-fourths  per' cent  to  collect.  The 
internal  revenue  department  reports  that  the  average 
cost  of  collection  since  the  creation  of  the  bureau 
has  been  2.76  per  cent. 

Sec.  2.  The  expenditure  involved  in  the  payment 
of  salaries  to  legislative  officers,  when  any  such  are 
The  expenie  paid,  is  not  the  largest  part  of  the  ex- 
tive  demrt^  penses  caused  by  the  maintenance  of  such 
ment.  bodies.    There  are  the  clerks,  aides,  pages, 

etc.,  in  immediate  attendance  upon  the  bodies  dur- 
ing their  session,  the  expenses  of  elections,  which  in 
this  case  swell  to  considerable  amounts,  the  costs 
of  investigations,  public  hearings,  etc.,  necessary  to 
put  the  legislature  in  possession  of  the  facts  upon 
which  to  base  their  actions,  and  the  expenses  of  pro- 
mulgating laws,  publishing  speeches,  reports,  etc.,  all 


CHAP.  II     EXPENDITURE  FOR    COMMON  BENEFIT      45 

of  which  together  form  no  inconsiderable  burden  on 
the  finances  of  every  nation  enjoying  legislative  gov- 
ernment. These  expenses  also  extend  from  the 
federal  government  down  to  the  municipal  govern- 
ments. The  desirableness  or  undesirableness  of  pay- 
ing legislative  officers  for  their  services  is  a  matter  for 
political  science  to  determine,  and  depends  in  large 
measure  upon  the  traditions  of  the  different  peoples. 
In  England  relatively  little  is  spent  in  this  way  in  any 
of  the  legislative  departments  of  the  government  from 
Parliament  down  to  the  parish.  But  in  that  country 
there  is  a  tradition  of  unpaid  public  service  that  gives 
her  much  help  in  this  direction.  In  the  United 
States  the  direct  emoluments  and  other  legitimate 
expenses  of  the  federal  Congress,  and  the  direct  and 
indirect,  more  or  less  illegal,  raids  by  the  common- 
wealth legislatures  on  the  treasuries,  as  well  as  those 
made  by  the  city  councillors  and  aldermen,  are  very 
large.  It  has  been  estimated  by  Mr.  Moffett^  that 
in  the  52d  Congress  of  the  United  States  it  2%e  ^o^t  of 
cost  $4,593,922.60  to  maintain  the  House  Congress. 
of  Representatives  alone,  for  one  year,  exclusive  of 
election  expenses,  or  about  16285  a  day  for  each  day  of 
its  existence,  including  Sundays  and  holidays.  Of 
this  amount  $3,320,000  went  for  salaries.  There 
were,  therefore,  $1,180,000  spent  on  travelling  ex- 
penses, clerks,  subordinate  house  officials,  and  contin- 
gent expenses  (including  about  $100,000 for  stationery 
and  newspapers).  But  this  is  by  no  means  all. 
1  Suggestions  on  Government^  p.  150. 


46  INTRODUCTION  TO  PUBLIC  FINANCE      part  i 

The  expenses  traceable  mainly  to  this  source  in  the 
reports  of  the  auditors,  of  which  public  printing  for 
Congress  is  an  important  item,  foot  up  to  about 
$7,000,000  per  annum,  or  for  the  two  years  of  the 
life  of  a  Congress  114,000,000.  The  real  cost  of  the 
federal  legislature  to  the  country  is  even  larger  than 
that,  but  the  items  are  not  easily  traceable  in  the  re- 
ports, and  some  of  them,  like  election  expenses,  are 
not  reported.  In  1906  the  net  disbursements  for 
Congress,  one  year  only,  were  15,555,663,  public 
printing  $5,746,177.  Since  then  the  salaries  have 
been  raised  from  $5000  to  $7500.  Directly  traceable 
to  the  legislative  departments  of  the  federal,  common- 
wealth, and  local  governments  were  costs  amounting 
in  1890,  to  $10,500,000,  and  by  1902  these  had  grown 
to  $12,656,309.  The  only  expenses  <lirectly  attribu- 
table to  this  source  in  England  are  for  the  officers  of 
The  cost  of  tlie  House  of  Lords,  £37,257  (in  1906), 
Parliament,  and  for  the  officers  of  the  House  of  Com- 
mons, £55,576;  total  £92,833.  But  many  expenses 
attributed  to  the  different  departments  should  be  in- 
cluded. The  fact  that  the  ministry  is  at  the  same 
time  executive  and  legislative  causes  a  different  dis- 
tribution of  the  cost,  and  it  is  impossible  to  arrive  at 
an  estimate  even  as  accurate  as  in  the  case  of  the 
United  States.  England  does  not  print  public  docu- 
ments for  free  distribution,  so  that  the  expense  for 
stationery  and  printing  is  less  than  half  of  that  of 
the  United  States,  being  a  little  over  £500,000. 
Some  mention  should  also  be  made  of  the  expenses 


CHAP.  II      EXPENDITURE   FOR   COMMON  BENEFIT      47 

involved  in  the  support  of  local  or  semi-local  legisla- 
tive bodies.  For  the  United  States,  there  are  the 
State  legislatures  and  the  city  councils,  Q(^^i  ^y  i^^^i 
and,  for  England,  the  local  government  councils. 
board  and  the  county  and  municipal  councils.  Of 
these,  only  the  commonwealth  legislatures  are  purely 
legislative  in  character.  The  others  perform  func- 
tions which  are  better  described  as  administrative. 
It  is  so  difficult  to  obtain  a  correct  estimate  of  the 
particular  expenses  for  the  support  of  these  subordi- 
nate bodies  as  to  be  an  unprofitable  task.  These 
bodies,  too,  are  so  intimately  concerned  in  the  ad- 
ministration of  the  other  functions  that  we  gain 
little  by  isolating  the  mere  expenses  of  their  mainte- 
nance. With  the  commonwealth  legislatures,  how- 
ever, the  matter  is  different.  These  are  purely 
legislative.  In  most  commonwealths  the  The  cost  of 
legislatures  are  paid  per  diem,  and  they  Zluuegis- 
are  prevented  from  running  up  too  large  latures. 
bills  by  the  limitation  of  their  term.  The  per  diem 
remuneration  and  mileage  are  fixed  by  law,  and 
range  from  |5  to  SIO  a  day  and  from  five  cents  to 
ten  cents  per  mile.  A  loophole  for  additional  ex- 
pense is  left  by  the  necessity  of  allowing  the  legisla- 
ture to  appropriate  money  for  incidental  expenses. 
In  some  commonwealths,  as  for  example  in  Califor- 
nia, this  power  has  at  times  been  abused  to  such  an 
extent  that  the  contingent  expenses  amounted  to  much 
more  than  the  mileage,  regular  clerk  hire,  etc.,  com- 
bined.    Money  was  spent  for  the  hire  of  personal  at- 


48  INTRODUCTION  TO  PUBLIC  FINANCE      part  \ 

tendaiits  on  members,  stenographers,  clerks,  etc.,  for 
tours  of  inspection  to  various  institutions,  and  the  like. 
This  abuse  became  so  flagrant  in  California,  that  it 
was  eventually  prohibited  by  a  constitutional  amend- 
ment limiting  the  expenses  of  the  legislature.  Most 
of  this  expenditure  contravenes  the  rule  of  economy. 
England  in  the  absence  of  the  federal  system  is 
spared  this  expense. 

A  very  considerable  part  of  the  expense  of  main- 
taining the  judiciary  is  treated  as  a  matter  of  com- 
Qostofmain.  ^lou  benefit.  These  expenditures  are 
taining  the  sufficient  to  insure  the  continued  exist- 
ju  iciary.  ^^^^  ^£  ^^^  courts,  whether  they  have 
any  litigation  before  them  or  not.  But  as  some  part, 
and  often  a  very  considerable  part,  of  the  costs  of 
actual  litigation  falls  on  the  litigants,  and  as  the 
courts  are,  in  most  places,  almost  continuously  en- 
gaged in  work  of  that  kind,  it  seems  more  consistent 
with  our  classification  to  treat  this  expenditure  as 
one  partly  for  private  benefit,  under  class  three. 

Sec.  3.  The  construction  and  maintenance  of 
public  buildings  for  the  convenience  of  the  execu- 
Puhiic  huiid-  tive  and  legislative  departments  and  for 
i-ngs.  other  purposes  is  one  of  the  most  impor- 

tant although  not  one  of  the  largest  items  of  expen- 
diture. The  construction  of  such  buildings  is  of 
course  necessary.  That  they  should  be  imposing 
edifices,  handsomely  decorated  and  equipped,  is  a 
matter  of  national  and  local  pride.  That  their  con 
struction  should  not  be  wasteful  is  self-evident.     The 


CHAP.  II     EXPENDITURE  FOR    COMMON  BENEFIT      49 

extravagances  and  theft  which  have  too  often  accom- 
panied the  construction  of  such  buildings  in  the 
United  States  are  too  well  known  to  need  discussion. 
They  are  purely  abuses  and  need  no  further  words  of 
condemnation  than  they  have  always  received.  The 
cost  of  construction  may  be  regarded  as  a  permanent 
investment,  not  yielding  a  money  revenue,  but  im- 
portant utilities.  The  federal  government  spends 
annually  about  i>3,500,000  upon  public  buildings. 
In  1902,  including  new  buildings  and  sites,  the 
amount  was  16,610,475.  From  1789  down  to  1882 
it  spent  185,591,590  for  the  same  purpose,  or  an  av- 
erage of  about  $900,000  per  annum.  In  1890,  all  the 
different  branches  of  the  government  together  in  the 
United  States  spent  $56,841,147  upon  public  build- 
ings. The  British  'government  spent,  in  1894, 
X  1,750,000  on  the  special  account  of  public  build- 
ings, but  there  are  a  good  many  similar  expenses 
included  in  the  other  supply  services.  These  expen- 
ditures are  obviously  subject  to  great  fluctuations 
from  year  to  year,  so  that  the  figures  given  are  merely 
illustrative,  not  typical. 

The  exact  annual  value  of  these  utilities  to  the 
government  cannot  be  directly  estimated  in  money. 
Indirectly  it  might  be  estimated  as  the   t^^q  ^aiue  of 

equivalent  of  the  interest  on  the  sums  public  build- 
ings. 
which  it  would  cost  to  replace  them  in 

the  most  economical  manner,  less  the  annual  cost  of 
the  repairs.  As,  in  some  cases,  the  original  expendi- 
tures were  extravagant  and  wasteful,  this  method  of 


50  INTRODUCTION   TO  PUBLIC  FINANCE     part  I 

computation  would  result  in  a  smaller  sum  than  the 
interest  on  the  original  cost. 

Sec.  4.  A  nation  differs  from  individuals  in  that 
no  law  can  be  imposed  upon  it  by  any  external  human 
power.  The  enforcement  of  the  rights  and  obliga- 
tions of  nations  in  their  intercourse  with  one  another 
is  left  to  the  different  nations  themselves.  As  long 
as  international  law  offers  no  peaceful  means  of  re- 
dressing wrongs,  war  is  the  only  resource.  "  Inter- 
national law,"  says  Woolsey,  "assumes  that  there 
must  be  'wars  and  fightings'  among  the  nations." 
This  assumption  is  universally  correct.  There  are 
no  signs,  as  yet,  in  spite  of  the  peace  conferences  at 
The  Hague,  that  nations  will  cease  to  consider  that 
war,  or  at  least  the  actual  preparation  therefor,  as  its 
The  CO  of  ^^^^  preventive,  is  an  absolute  necessity. 
defence  is  un-  The  whole  theory  of  the  independence 
avoi  a  e.  ^^^^  equality  of  sovereign  States,  upon 
which  international  law  proceeds,  throws  the  main- 
tenance of  national  dignity,  honour,  and  recognised 
national  rights  upon  the  nations  themselves.  The 
extent  and  character  of  preparation  for  war  in  each 
State  depends  upon  its  history,  national  character, 
and  geographical  situation.  Thus,  the  warlike  tra- 
ditions, the  mutual  distrust,  and  contiguity  of  France 
and  Germany,  impel  to  extensive  preparation  for 
war,  and  similar  considerations  affect  other  nations 
of  Europe.  On  the  other  hand,  the  traditions, 
national  character,  and  geographical  position  of  the 
United   States,  until   after   the  war  with  Spain   in 


CHAP.  II    EXPENDITURE  FOR    COMMON  BENEFIT       5i 

1898,  led  to  a  feeling  of  security,  and  a  preparation 
so  insignificant,  compared  to  European  armaments, 
as  to  call  forth  continual  warnings  and  protests  from 
military  authorities.  As  a  result  of  the  acquisition 
of  territory  in  the  Pacific,  and  in  the  Orient,  there 
has  been  tlirown  upon  the  United  States  the  burden 
of  maintaining  the  bulwark  between  the  white  and 
the  yellow  races,  on  the  western  side  of  the  territory 
occupied  by  the  whites.  The  unavoidable  expenses 
for  this  purpose,  while  they  have  not  yet  reached  the 
magnitude  of  those  of  England  and  of  Russia  for  the 
defence  of  the  eastern  side  of  their  outlying  posses- 
sions, are  already  large  and  are  growing  rapidly. 
The  necessity  and  probable  continuance  of  this  bur- 
den on  the  finances  of  nations  being  thus  predeter- 
mined, the  only  task  for  the  student  of  finance  is 
to  ascertain  how  great  a  burden  this  imposes  on  the 
treasuries  and  what  possibility  there  is  for  some 
return. 

There  has   been  much  discussion  of  the  relative 
merits  and   economy   of   the   different   methods   of 
army  organisation.     It    is   pointed    out  ^ji^eren^  51/s- 
that  the  German  system  of  compulsory  temsofarmy 
,,     .   .  .,1        ,  organisation. 

service  of  all  citizens  without  remunera- 
tion shows  a  much  smaller  cost,  per  man,  than  tlie 
English  and  American  system  of  paid  enlistment. 
But  it  is  urged  again  that  there  are  in  Germany 
a  larger  number  of  expenses  involved  in  the  army 
system  than  those  of  the  government,  as  the  per- 
sonal expenditures  of  the  soldiers,  the   cost  to  the 


62  INTRODUCTION  TO  PUBLIC  FINANCE     part  v 

country  from  the  disturbance  of  production,  the 
extra  costs  of  enrohnent,  of  free  quarters  during 
manoeuvres,  etc.,  which  do  not  appear  in  the  budget, 
but  which  should  be  counted  in  before  any  fair 
comparison  can  be  made.  It  would  seem  that,  in 
the  end,  the  actual  net  expenditure  for  this  purpose 
could  only  be  as  much  less,  per  man,  as  the  standard 
of  living  of  the  soldier  is  less  in  the  one  country 
than  in  the  other.  And  on  this  ground  it  might 
be  urged  that  the  German  system,  which  gives  the 
soldier  but  little  spending  money  to  waste,  and  by 
very  strenuous  measures  inculcates  thrift  and  almost 
penurious  economy,  is  on  the  whole  the  cheaper. 
How  much  again  this  lessens  the  efficiency,  per 
man,  and  necessitates  a  larger  number  of  soldiers  is 
hard  to  estimate.  In  England  the  volunteer  system, 
while  adding  somewhat  to  the  cost,  does  not  make 
as  heavy  drains  on  the  treasury  as  do  the  German 
reserves ;  but  as  the  expenditure  by  the  individual 
members  of  the  volunteer  service  is  for  a  public 
purpose,  it  is  a  part  of  the  cost  of  the  system,  and 
a  part  that  is  very  difficult  to  estimate.  On  the 
whole  no  accurate  comparison  is  possible.  The  act- 
ual expenses  of  the  different  nations  as  they  ap- 
pear in  the  budgets  are  as  follows  :  England,  1894- 
1895,  army  £18,000,000,  navy  .£18,700,000,  together 
£36,700,000;  1908-1909,  army  £27,459,000,  navy 
£32,319,500,  together  £61,778,500.  United  States, 
1895,  army  $54,500,000,  navy  $31,700,000,  total 
$86,200,000,  but  this  includes  over  $16,000,000  for 


CHAP.  11    EXPENDITURE  FOR    COMMON  BENEFIT       53 

the  construction  of  new  vessels."  In  1906,  the 
United  States  spent  on  the  military  establishment 
$117,946,692,  and  on  the  navy  $110,474,264,  together 
1228,420,856.  Including  the  amounts  spent  by  the 
commonwealths  the  total  expenditure  for  military 
purposes  and  the  navy  in  the  United  States  were,  in 
1890,  $57,544,617,  and  in  1902  over  $200,000,000.1 
One  of  the  main  features  of  the  American  system  is 
the  establishment  of  training  schools  for  officers,  cost- 
ing $360,000  for  the  military  and  $220,000  for  the 
naval  academy.  In  most  countries  the  preparation 
for  war  is  a  source  of  rapidly  growing  expenditure. 

Aside  from  maintaining  the  integrity  and  the  dig- 
nity of  the  State,  which  are,  of  course,  the  greatest 
conceivable  public  benefits,  the  expendi-   ^h^  eeonom- 
tures  for  the   army  and  the  navy  yield  ic  and  social 

T   .1      T  .  rtM  returns  for 

little  direct  economic  return.  Ihe  navy  military  ez- 
protects  the  citizens  abroad  and  contrib-  penditures. 
utes  thus  to  the  pursuit  of  commerce  ;  while  the 
army,  likewise,  keeps  open  the  channels  of  internal 
trade.  In  those  countries  where  the  entire  male 
population  is  passed  through  rigid  military  training, 
the  military  system  supplements  in  a  very  important 
manner  the  general  educational  system  and  gives 
valuable   mental  and  physical   training.     Countries 

1  The  exact  amount  cannot  be  stated  as  the  census  report,  the 
only  available  compilation  bringing  together  the  expenditures  of  the 
commonwealths,  includes  the  expenditure  for  police  with  those  for 
the  militia.  The  items  are:  Federal  expenses,  army  and  navy, 
$154,237,229 ;  for  increase  of  navy  $26,667,104,  and  commonwealths' 
expenditure,  militia  and  police,  $54,551,829. 


54  INTRODUCTION   TO  PUBLIC  FINANCE      part  v 

with  a  small  standing  army  participate  in  this 
benefit  to  a  much  smaller  degree.  The  existence  of  a 
strong  military  spirit  fosters  the  virility  of  a  people, 
and  hence  contributes  to  its  manhood  and  efficiency 
in  every  direction,  while  the  absence  of  that  spirit  be- 
tokens effeminateness  and  degeneracy.  But  these 
are  benefits  that  cannot  be  measured  statistically,  nor 
in  money,  and  must  be  left  for  the  sociologists  to 
discuss. 

The  expenses  of  actual  war  ai-e  not  a  part  of  the 
regular  budget  of  modern  nations.  They  are  always 
The  expense  treated  as  exceptional  or  extraordinary 
of  war.  expenses.     Besides  the  sums  actually  ex- 

pended by  the  public  treasury  there  are  many  indi- 
rect losses  and  expenses  involved.  According  to  the 
estimates  of  Wilson  ^  the  cost  of  wars- to  England  from 
1688  to  1882  was  over  Xl,258,680,000.  The  esti- 
mated cost  of  the  Boer  War  to  England  was  over 
£182,000,000.  The  cost  to  the  United  States  of  the 
Civil  War  is  hard  to  estimate.  The  debt  incurred 
amounted  to  $1,845,900,000 ;  8800,000,000  of  revenues 
were  spent  during  the  war ;  commonwealths  and 
cities  spent  a  part  of  their  current  revenues  and 
rolled  up  debts,  and  the  pensions  will  probably 
amount  to  over  $2,000,000,000;  $6,000,000,000  repre- 
sents approximately  the  actual  expenditure  by  all  the 
governmental  agencies  on  the  side  of  the  North. 

The  general  preparation  for  internal  peace  and 
security  and  the  prosecution  or  punishment  of  the 
^  The  National  Budget^  etc. 


CHAP.  II      EXPENDITURE   FOR    COMMON  BENEFIT     55 

disturbance  of  that  security  by  individuals  or  small 
groups  of  persons  is  a  very  important  intemaipeace 
item  of  expense.  Such  security  is  gen-  and  security. 
erally  maintained  by  the  police  and  the  military. 
In  the  United  States  the  chief  expense  is  borne  by 
the  cities.  The  states  and  counties  have  their  own 
police  officers  for  this  purpose,  as  do  also  towns  not 
cities.  The  cost  of  the  police  for  the  whole  of  tlie 
United  States  was,  in  1890,  123,934,376.  In  1902 
the  combined  expenses  of  the  police  and  of  the  com- 
monwealths' militia  was  $54,551,829. 

Sec.  5.  The  building  and  maintenance  of  roads 
is  a  source  of  expenditure  which  well  illustrates  the 
general  trend  of  development.  Adam  Smith  re- 
garded the  maintenance  of  roads  as  an   ^, 

"  The  cost  of 

activity  conferring  so  special  a  benefit  on  roads,  a  com- 
the  individual  user  that  he  should  bear  ^«^&"'-^«^*- 
the  burden.  Even  Bastable  places  them  among  the 
"  industries  of  the  State."  ^  But  the  universal  ten- 
dency is  to  make  the  maintenance  of  roads  a  common 
burden  because  conferring  a  common  benefit.  The 
care  of  the  roads  is  generally  a  duty  of  the  local 
governments,  and  in  the  United  States  the  first  taxes 
laid  in  the  colonies,  and  afterwards  in  the  new  states, 
were  for  this  purpose.  The  federal  government 
stopped  spending  much  for  roads  and  canals  after 
1840.  In  the  period  from  1T89-1882  the  total  ex- 
penditure by  the  federal  government  was  only 
$19,966,465.  In  the  year  1890  the  commonwealths 
1  Pp.  193, 194. 


56  INTRODUCTION   TO  PUBIIC  FINANCE     part  i 

and  local  governments  spent  172,262,023  on  roada^ 
sewers,  ditches,  and  bridges.  In  1902'  this  amount, 
including  street  lighting,  amounted  to  f  148,198,837. 
The  maintenance  of  waterways,  roadsteads,  har- 
bours,  rivers,    canals,   is    also    a    public    function. 

„  ^,.  . ,  Canals,  to  be  sure,  have  passed,  or  are 
Public  assist-  '  '  r  » 

ance  to  nam-  passing,  through  the  same  development 
gallon.  ^^  roads,  and  in  some  respects  harbours 

and  rivers  have  also  done  so.  In  the  United  States 
the  dredging  and  improvement  of  the  facilities  for 
navigation  in  rivers  and  harbours  are  the  only  im- 
portant items  of  "  internal  improvement  "  that  have 
been  consistently  held  in  the  hands  of  the  federal 
government.  From  1789-1882  Congress  spent 
$106,  882,717  on  rivers  and  harbours,  and  in  1890, 
$11,737,438  were  spent  thereon.  In  1902  the  amount 
was  $19,590,082.  In  the  same  line  is  the  main- 
tenance of  lighthouses,  signal-stations,  the  weather 
bureau,  and  life-saving  stations.  The  last-named 
is  in  some  countries  supported,  in  part,  by  pri- 
vate contributions  ;  in  the  United  States  it  costs 
$1,746,841.  The  construction  of  lighthouses,  bea- 
cons, and  buoys  cost  from  1789-1882,  $77,080,509. 
In  1894  the  lighthouse  service  cost  the  United 
States  $3,250,000  ;  in  1902,  $4,537,316. 

Sec.  6.  No  expenditure  commends  itself  more 
than  that  for  education.  It  creates  the  groundwork 
The  cost  of  of  all  political  institutions.  No  expen- 
education.  ^ji^ure  in  the  opinion  of  Geffcken  is  more 
"reproductive"  than  that  which  the  State   makes 


CHAP.  II      EXPENDITURE  FOR    COMMON  BENEFIT     57 

for  the  development  of  its  future  citizens.  But 
the  expenditure  of  the  various  countries  for  this 
purpose  cannot  very  well  be  compared,  because  it 
is  very  difficult  to  obtain  a  complete  statement  of 
all  the  outgo  under  this  head.  The  local  govern- 
ments generally  have  certain  lower  branches  under 
their  control  and  pay  a  part  or  the  whole  of  the 
expense  of  those.  In  federal  governments  the  re- 
mainder of  the  system  is  generally  under  the  control 
of  the  component  parts.  The  United  States  federal 
government  has  rendered  assistance  to  the  common- 
wealth and  local  schools  by  grants  of  land  of  un- 
known, but  very  large  value,  and  by  the  collection 
and  dissemination  of  information  through  a  bureau 
of  education,  and  in  various  other  ways.  In  Eng- 
land the  provision  for  education  made  by  public 
authorities  is  generally  less  than  in  most  other 
countries,  the  sole  exception  being  the  provision  for 
technical  education.  Until  very  recently  this  line 
of  public  activity  has  been  regarded  by  that  country 
as  one  conferring  a  special  benefit  and  to  be  paid  for 
in  part  by  fees.  But  it  is  now  pretty  clearly  the 
accepted  policy  of  all  modern  nations  to  provide  at 
least  the  primary  education  necessary  for  Elementary 
every  citizen  as  a  common  benefit  and  to  education 

•^    ^  n      1        treated  as  a 

make  it  compulsory  and  free  to  all  the  common 
recipients.     In  treatment,  then,  it  is  re-  ^^^^fi^- 
garded  as  being  as  much  a  benefit  to  the  rich  child- 
less man  to  have  the  sons  of  his  poorer  neighbour 
educated  as  that  he  should  have  the  protection  of 


58  INTRODUCTION   TO  PUBLIC  FINANCE      part  \ 

the  police  in  the  enjoyment  of  his  property,  and  he 
is  made  to  pay  on  that  principle.  In  regard  to 
higher  education  as  given  in  the  secondary  schools, 
and  technical  education,  there  is  no  such  uniformity 
of  practice.  Education  in  the  rudimentary  mechani- 
Technical  cal  arts  is  in  fact  becoming  as  important 
education.  ^  need  of  society  as  elementary  education 
in  the  usual  branches.  As  the  pace  of  industry  be- 
comes more  rapid  and  its  organisation  more  perfect, 
the  possibility  of  giving  this  sort  of  instruction  by 
the  old  apprenticeship  system  vanishes.  There  is 
no  place  for  the  boy  in  the  modern  factory.  Pri- 
vate initiative  cannot  be  depended  upon  to  supply 
the  opportunity  for  this  sort  of  education.  The 
State  has  to  do  so  if  it  is  done  at  all.  In  this  re- 
spect many  of  the  English  cities  are  far  ahead  of 
any  American  city.^ 

Whether  college  and  university  education  should 
be  given  the  recipients  free  of  charge  at  the  common 
University  cost  is,  in  practice,  also  an  open  question. 
education  not    jj^d  not  liberal  private  endowments  been 

yet  treated  as  i     j.  . 

a  common        made  for  this  purpose,  it  is  probable  that 

benefit-  the  question  would  long  ago  have  been 

settled,  and  that  this  branch  of  education  would 
have  been  treated  as  the  primary  was.  University 
education,  even  though  enjoyed  by  but  a  relatively 
small  number  of  the  citizens,  is  quite  as  "  reproduc- 
tive" and  as  beneficial  to  the  State  as  a  whole  as 
even  a  widely  diffused  system  of  primary  schools. 
1  Shaw,  Municipal  Government  in  Great  Britain. 


CHAP.   II     EXPENDITURE  FOR    COMMON  BENEFIT      59 

It  is  quite  as  important,  if  not  more  important,  to 
have  highly  trained  leaders  of  puhlic  action  and 
thought  as  it  is  to  have  a  low  degree  of  intelligence 
widely  disseminated.  The  university  as  a  centre 
for  research  alone  is  worth  many  times  what  it  costs 
if  properly  conducted.  In  proportion  to  the  benefits 
which  it  confers  on  the  State  it  is,  where  run  at  the 
general  cost,  the  least  expensive  part  of  the  whole 
system.  The  provision  made  by  many  of  the  west- 
ern commonwealths  of  the  United  States  for  the 
liberal  support  of  universities  from  the  public  funds 
has  been  without  exception  the  most  beneficial  and 
economical  expenditure  they  have  made.  In  Ger- 
many, too,  a  large  part  of  the  expense  is  borne  by 
the  State.  Closely  related  to  education  is  the  main- 
tenance of  museums,  libraries,  picture  galleries,  and 
scientific  investigations.  These  comprise  in  most 
countries  an  important  part  of  the  provision  for  edu- 
cation. In  1906  the  following  amounts  were  spent  in 
England  and  Wales  for  educational  purposes  :  by  the 
local  educational  authorities  £20,403,935,  by  the  board 
of  education  out  of  parliamentary  vote  .£12,604,048. 
Parliament  also  voted  £1,708,201  for  primary  schools 
in  Scotland  and  X  1,466,574  for  primary  schools  in  Ire- 
land. In  the  United  States  in  1890  the  total  public 
expenditure  for  education  was  $145,583,115,  which 
was  by  far  the  largest  expenditure  for  any  one  purpose. 
By  1902  the  annual  expenditure  for  education  of  a 
public  character  had  increased  to  $281,219,278. 
Sec.  7.    Indirectly  all  public  expenditure  aids  pri- 


60  INTRODUCTION  TO  PUBLIC  FINANCE       parti' 

vate  industry  and  commerce.     But  there  are  manj' 
,    .  ^    forms  of  direct  aid  that  are  treated  and 

Assistance  of 

industry  and  regarded  as  conferring  a  common  bene^ 
commerce.        g^  ^^  ^^^  ^^.j^^  although  accruing  to  the 

good  of  certain  persons.  Bounties  are  sometimes 
offered  for  certain  products.  Enterprises  of  various 
kinds  receive  subventions  or  partial  and  even  com- 
plete exemption  from  taxation.  The  so-called  pro- 
tective system  involves  an  indirect  expenditure  of 
the  people's  money  in  the  same  way.  The  expense 
of  maintaining  the  currency,  of  building  and  keep- 
ing up  roads,  canals,  harbours,  and  the  like,  is  of  the 
same  character.  So  are  many  public  buildings,  as 
exchanges,  markets,  slaughter-houses,  structures  and 
grounds  for  public  fairs  and  the  like,  and  commis- 
sions and  other  organisations  for  collecting  and 
disseminating  knowledge  concerning  horticulture, 
agriculture,  and  various  industries.  Tlie  mainte- 
nance of  a  system  of  weights  and  measures  also 
belongs  here.  Besides  all  those  mentioned  and  some 
others  which  are  generally  treated  as  expenditures 
for  the  common  benefit,  there  are  a  great  many 
things  which  the  State  does  for  the  benefit  and  as- 
sistance of  industry  and  commerce  that  are  regarded 
as  conferring  special  benefit  and  treated  as  such. 

The  administrative  control  of  private  industry 
Control  of  ^^^  commerce  has  become  a  necessity  on 
pnvate  enter-  account  of  the  growing  power  of  modern 
P^^^'  organisations  of   capital  and  the   grow- 

ing importance   of   the   "  public "   functions  which 


CHAP.  11      EXPENDITURE  FOR    COMMON  BENEFIT     61 

many  of  these  private  enterprises  perform.  The 
necessity  has  been  widely  felt  of  controlling  indus- 
trial monopolies,  and  we  have  numerous  commissions 
for  the  regulation  of  railroads  and  other  public-service 
industries.  To  this  branch  of  expenditure  belongs 
also  the  cost  of  the  control  exercised  over  the  pro- 
duction and  sale  of  foods  for  the  protection  of  the 
public  health.  This  is  mainly  an  expenditure  of  the 
local  governments,  although  it  occasionally  enters 
into  that  of  the  central  government,  especially  in  the 
case  of  imported  foods.  In  the  United  States  the 
federal  government  has  assumed  this  important  func- 
tion, and  many  of  the  states  are  supplementing  its 
work.  The  cost  of  the  enforcement  of  sanitary  reg- 
ulations of  all  sorts  is  another  expenditure  of  the 
same  character. 


CHAPTER  III 

EXPENDITURE    FOR    THE    BENEFIT   OF   INDIVIDUALS 

Section  1.  In  this  chapter  we  shall  consider  the 
remaining  three  classes  of  expenditure.  These  are  not 
so  very  closely  akin,  but  have  one  point  of  similarity; 
namely,  that  they  are  all  regarded  as  to  a  greater  or 
lesser  extent  for  the  particular  benefit  of  individuals. 
The  first,  however,  is  not  so  treated  by  any  nation,  but 
is  treated  as  though  it  were  an  expenditure  for  the 
Charitable  benefit  of  all.  The  relief  of  indigence  and 
expenditure,  j^q  protection  of  society  against  the  insane 
and  the  criminal,  the  care  of  the  feeble-minded  and 
otherwise  defective  classes,  and  the  care  of  the  sick 
are  among  the  most  costly  and  most  discouraging  fea- 
tures of  public  expenditure.  In  the  United  States 
the  expenditure  for  pensions,  charities,  and  gratui- 
ties amounted,  in  1902,  to  $196,826,069.  Generally, 
even  after  the  State  has  done  all  that  it  can  be  in- 
duced to  do,  there  is  still  room  for  private  effort  in 
the  same  direction.  The  expenditure  by  private 
persons  and  societies  for  exactly  the  same  purposes  is 
possibly  larger  than  that  of  the  government;  so 
that  this  is  one  of  the  heaviest  of  all  public  expendi- 
tures. The  relief  of  poverty  has  generally  received 
more  attention   in   treatises  on  economics   than   in 

62 


CHAP.  Ill      EXPENDITURE  FOR  INDIVIDUALS  63 

works  on  public  finance.  But  it  belongs  very  prop- 
erly to  the  latter  science  as  well.  It  is  generally  a 
local,  rather  than  a  national,  expenditure,  but  on 
account  of  its  vast  size  and  economic  importance  has 
often  received  the  attention  of  the  central  authorities, 
and  is  in  many  cases,  at  least  partly,  under  their 
control.  There  is  almost  no  expenditure  that  fails 
so  signally  to  accomplish  anything  like  permanent 
results.  As  frequently  administered,  poor  relief  has 
aggravated  the  very  evils  it  has  been  intended  to  re- 
lieve. The  words  of  Malthus  are  still  true :  "  We 
have  lavished  enormous  sums  on  the  poor,  which  we 
have  every  reason  to  believe  have  constantly  tended 
to  aggravate  their  misery."  ^  Yet  the  expenditure 
is  necessary,  indeed  imperative,  and  will  be  so  as 
long  as  the  present  sentiments  on  the  subject  pre- 
vail, unless  we  can  remove  the  causes.  That  this 
may  be  done  by  the  extension  of  educational  facili- 
ties, especially  technical  schools,  is  a  frequent  con- 
tention. The  systematic  relief  of  poverty  in  such 
manner  as  to  lessen  its  evils  has  recently  become  the 
study  of  scholars  and  of  able  administrators  and  some 
progress  has  been  made.  The  student  of  finance  need 
not  enter  into  the  question  of  the  causes  nor  of  the 
cure  of  poverty.  Indigence  there  is,  and  the  State 
has  assumed  the  duty  of  relieving  it.  The  modern 
methods  of  relief  are  fast  coming  to  be  as  economical 
and  efficient  as  the  conditions  under  which  they  are 
necessarily  administered  admit.  Like  war,  this  is  a 
1  Essay,  p.  438. 


64  INTRODUCTION  TO  PUBLIC  FINANCE     part  i 

form  of  expenditure  that  shows  little  tangible  result 
that  can  be  measured  in  terms  of  money. 

The  general  principle  applied  in  the  granting  of 
continued  assistance  to  the  poor  is  that  the  cause 
Theprincipies  of  poverty  to  be  relieved  must  be  such 
governing  the  ^^^^  -^  ^^^^^^  ^^  removed  by  the  Individ- 

granting  of  J 

assistance.  ual"  efforts  of  the  candidates  for  assistance. 
In  other  cases,  only  temporary  assistance  is  rendered. 
Those  who  can  help  themselves  are  desired  to  do 
so.  The  four  agencies  which  really  work  together 
toward  the  same  end  are  the  civil,  the  ecclesiastical, 
the  associated,^  and  the  individual.  These  should  all 
work  harmoniously  and  should  avoid  duplication  of 
work.  The  assisted  persons  should,  so  far  as  possi- 
ble, be  put  under  conditions  which  will  enable  them 
to  help  themselves  to  the  limited  extent  that  they 
are  able.  The  repression  of  vagrancy  and  the  pun- 
ishment of  wilful  paupers,  who  are  really  able  to 
support  themselves  but  unwilling  to  do  so,  is  left  to 
the  courts. 

Although  poor  relief  is  mainly  a  local  duty.  Great 
Britain  contributes  <£ 710,000  annually  from  the  cen- 
tral treasury  for  "non-effective  and  charitable  ser- 
vices" ;  of  this,  however,  over  £500,000  are  for 
pensions.  In  the  United  States  in  1902  public  chari- 
ties alone  (not  including  pensions)  cost  158,400,000  : 
but  this  sum  does  not  include  the  value  of  provisions, 
etc.,  raised  on  the  poor-farms,  or  at  the  workhouses, 
of  which  no  accurate  estimate  can  be  formed. 
»  Associations  or  leagues  of  charitable  organisations. 


CHAP.  Ill      EXPENDITURE  FOR  INDIVIDUALS  65 

Very  different  from  the  older  sort  of  poor  relief 
is  the  institution  of  old-age  pensions  on  the  insur- 
ance plan.  Such  institutions,  for  example,  as  the 
German,  for    compulsory  insurance  may    ^ 

•^     Insurance 

be  made  self-supporting  and  in  time  against  old 
promise  to  relieve  the  State  of.  a  part  of  "^^* 
the  burden  of  poor  relief.'  Still  different  in  principle 
is  the  old-age  pension  system  adopted  in  England  in 
1908.  Under  this  system  it  is  provided  that  every 
man  or  woman,  who  has  attained  the  age  of  seventy 
years,  and  who  has  been  a  British  subject  and  had  his 
or  her  residence  in  the  United  Kingdom  for  twenty 
years,  and  whose  means  do  not  exceed    „  . .  ,    , , 

•^  British  old- 

<£31  10«.  (or  about  $150)  per  annum,  age  pension 
shall  be  entitled  to  receive  a  pension.  *^*^^^- 
The  amount  of  the  pension,  which  is  to  vary 
with  the  private  income  of  the  pensioner,  ranges 
from  one  to  five  shillings  per  week.  Funds  for 
the  administration  and  for  the  payment  of  the  pen- 
sions are  to  be  provided  by  Parliament.  This  system 
appears  to  a  foreign  observer  to  amount  to  an  ex- 
tension of  the  relief  to  some  persons  who  would  not 
otherwise  receive  it,  and  to  a  transfer  of  a  part  of 
the  expense  from  the  local  to  the  central  govern- 
ment. It  also  seems  to  take  away  some  of  the  stigma 
that  attaches  to  the  acceptance  of  poor  relief  under 
the  old  system.  There  is  some  doubt  as  to  the 
amount  that  this  will  cost.  It  is  estimated  that 
500,000  persons  will  satisfy  the  conditions  and  be  en- 
titled to  pensions,  and  that  the  cost  will  be  about 


66  INTRODUCTION   TO  PUBLIC  FINANCE      part  i 

X6,000,000  per  annum.  But  no  estimate  is  available 
as  to  how  much  this  will  be  offset  by  the  reduction 
in  the  cost  to  the  local  governments. 

Modern  society  supports  the  insane  and  criminal 
classes  at  public  cost.  In  this  way  the  greatest 
lammand  possible  Saving  is  made.  Indeed,  the 
criminal  ^ost  need  not  be  nearly  as  great  as  it  is. 

classes  can  6e     _,  .  ,       ,  .  ,  , 

made  self-sup-  To  a  large  extent  prisons  can  be  made 
porting.  self-supporting.     It  is  perfectly  feasible 

by  a  proper  division  of  the  field  between  the 
different  institutions  to  make  the  prisons,  insane 
asylums,  and  the  like  entirely  self-sustaining.  Hard 
labour  is  frequently  a  part  of  the  criminal's  sentence; 
the  less  violent  insane  can  be  made  to  work,  and 
something  can  be  got,  by  proper  supervision,  from 
the  feeble-minded  and  .the  paupers.  By  an  exchange 
of  products  between  the  different  institutions  the 
necessary  diversity  can  be  obtained.  There  is  little 
excuse  for  the  too  common  uselessness  of  the  labour 
imposed  ;  the  tread-mill  and  oakum  picking  of  our 
older  prison  discipline ;  the  digging  of  unneeded 
ditches  by  the  insane,  etc.  Exchange  of  products, 
too,  avoids  the  danger  of  conflicts  with  the  labour 
unions,  which  so  often  arise  when  a  prison  attempts 
to  make  a  product  for  sale  in  the  open  market. 
This  expenditure  is  very  closely  related  to  the  one 
for  the  maintenance  of  internal  peace  and  security. 
The  burden  falls  mainly  upon  the  finances  of  the 
central  government,  or,  in  a  federal  State,  upon  those 
of   the  component   commonwealths.     The  policy  of 


CHAP.  Ill      EXPENDITURE  EOR  INDIVIDUALS  6T 

isolating  the  -defective  classes,  the  insane  and  crimi- 
nal, the  deaf  and  dumb,  the  feeble-minded,  and  the 
like,  is  an  economy  for  society  as  a  whole,  and  if  it 
can  be  made  to  prevent  the  propagation  of  these 
weaknesses,  is  far-sighted. 

Hospitals  for  the  sick  are  imperative  needs  in  the 
case  of  infectious  diseases  ;  they  are  great  blessings 
and  very  desirable  from  the  standpoint 
of  expediency  in  all  cases.  The  opposi- 
tion occasionally  manifested  by  selfish  private  med- 
ical practitioners  to  public  hospitals  is  a  sufficient 
proof  of  their  economy.  Fortunately  the  modern 
attitude  of  the  medical  profession  is  strongly  for 
preventive  measures  and  consequently  favours  the 
erection  and  support  of  hospitals.  Generally  this 
is  a  local  expenditure.  Certain  branches  of  the 
government,  like  the  military  and  the  naval,  have 
generally  found  it  necessary,  on  account  of  the  large 
number  of  persons  in  their  employ,  to  make  provision 
by  hospitals  for  the  care  of  their  own  sick.  The 
maintenance  of  quarantine  stations  for  the  isolation 
of  persons  coming  from  infected  countries  or  districts 
is  a  national  affair.  Its  cost  may  at  times  rise  to 
a  considerable  amount.  But  there  is  no  question  as 
to  its  necessity  and  economy.  In  the  United  States 
there  are  arrangements  for  quarantine  between  the 
different  States,  partly  at  the  cost  of  the  federal  gov- 
ernment and  partly  at  that  of  the  commonwealths. 
Quarantine  against  plant  and  animal  diseases  is  similar 
in  character,  and  the  expense  is  met  in  similar  ways, 


68  INTRODUCTION   TO  PUBLIC  FINANCE      part  » 

Sec.  2.  Old-age  pensions  for  officials  whose  lives 
have  been  spent  in  the  public  service,  or  for  soldiers 
whose  health  has  suffered,  for  the  good 
of  all,  are  but  the  proper  recognition  of 
those  services.  They  may  be  regarded  as  sums 
reserved  from  the  wages  from  year  to  year  and  paid 
over  in  this  form.  In  that  case  this  expenditure 
should  be  placed  under  class  one.  This  is  the  case 
with  most  of  the  pensions  in  England,  and  there 
they  are  generally  correctly  classed  under  the  ex- 
penditure for  the  departments  to  which  the  men 
pensioned  belonged  before  they  retired.  But  when 
this  expenditure  becomes,  as  it  was  in  the  past  in  too 
large  measure  in  America,  a  means  of  reward  for 
political  services  rendered  to  candidates  for  public 
office,  it  cannot  be  placed  anywhere  but  in  class  two, 
being  then  an  expenditure  for  the  benefit  of  certain 
persons  considered  as  though  it  were  for  the  benefit 
of  all.  The  rapid  increase  of  expenditure  for  this 
purpose  in  the  United  States,  as  well  as  the  curious 
features  of  that  increase,  show  that  it  cannot  all  be 
justified  by  any  rule  of  economy.  In  this  country 
only  soldiers  are  pensioned.  Under  general  laws, 
which  require  only  that  there  shall  be  sufficient  proof 
that  the  applicant  is  entitled  to  a  pension,  all  those 
who  base  their  claims  on  inability  to  work  or  ex- 
cellent services  are  pensioned.  But  many  others 
have  been  pensioned  by  special  acts  of  Congress. 
The  abuse  of  the  system  ceased  about  1900,  although 
the  pensions  granted  before  that  still  continue.     The 


CHAP.  Ill      EXPENDITURE  FOR  INDIVIDUALS  69 

amount  of  pensions  increased  after  the  Civil  War, 
rapidly  but  irregularly.  The  following  table  shows 
the  highest  and  the  lowest  points  of  each  fluctuation : 

1865 $  8,525,153 

1869 28,476,621 

1871 .  34,443,894 

1878 27,137,019 

1880 56,777,174 

1883 66,012,573 

1884 55,429,228 

1889 87,624,779 

1890  . 106,493,890 

1893 159,357,557 

1894 141,177,284 

1895 141,395,228 

1896 139,434,001 

1897 .  141,053,164 

1898 147,452,368 

1899 139,394,929 

1900 140,877,316 

1901 139,323,621 

1902 138,488,559 

1903  . , 138,425,646 

1904 142,559,266 

1905 141,773,964 

1906 141,034,5611 

^  The  total  disbursements  for  pensions  for  all  wars  and  for  the 
regular  establishment  down  to  1908  were :  War  of  the  Revolution 
(estimate)  $70,000,000 ;  War  of  1812  (on  account  of  service  without 
regard  to  disability)  $45,694,665  ;  Indian  wars  (on  account  of  service 
without  regard  to  disability),  19,355,711;  war  with  Mexico  (on 
account  of  service  without  regard  to  disability),  $40,876,879  ;  Civil 
War,  $3,533,593,025  ;  war  with  Spain  and  insurrection  in  the  Phil- 
ippine Islands,  $22,563,635  ;  regular  establishment,  $12,630,947; 
unclassified,  $16,393,945.  Total  disbursements  for  pensions, 
$3,751,108,809. 


70  INTRODUCTION  TO  PUBLIC  FINANCE      part  V 

Great  Britain  spends  about  X 550,000  on  "super- 
annuations and  retired  allowances,"  in  various  de- 
partments; but  special  pensions  for  distinguished 
services,  military  and  naval,  civil  and  judicial,  amount 
to  over  £110,000  more,  and  some  others  are  covered 
by  the  supplies  for  the  different  departments. 

Sec.  3.  Under  this  class  belongs  also  that  expen- 
diture which  is  made  for  the  development  of  indus- 
try by  bounties  and  the  protection  of  home  industries 
against  foreign  competition.  The  latter  expenditure 
differs  from  the  former  only  in  that  the  sums  spent 
do  not  pass  through  the  hands  of  the  officers  of  the 
treasury.  The  recipients  of  this  assistance  collect  it 
Assistance  to  directly  from  the  contributors  in  the 
industnjin      shape    of   hisfher   prices  for  their  wares 

the  form  of  ^  i        i  -i         ttt-   i 

bounties  and  than  would  otherwise  prevau.  With  the 
*' protection. "  economic  side  of  this  expenditure,  and  the 
possibility  or  impossibility  of  adding  permanently 
to  the  wealth  of  a  nation  by  this  process,  public 
finance  has  nothing  do.  But  as  many  important 
nations  practise  this  form  of  expenditure,  we  cannot 
avoid  at  least  a  statement  of  its  character.  The 
revenues  derived  by  the  government  from  taxes  on 
the  commodities  actually  imported  will  be  considered 
in  Part  II.  But  so  far  as  any  actual  "protection  " 
is  afforded  the  home  producer,  it  is  an  item  of  ex- 
penditure. In  effect  it  is  practically  the  same  as  if 
a  subsidy  or  bounty  were  paid  to  the  producers  out 
of  taxes  collected  from  the  consumers  of  the  goods  in 
question.      This  expenditure  is  made  not  so  much 


CHAP.  Ill      EXPENDITURE   FOR   INDIVIDUALS  71 

in  the  hope  of  increasing  the  total  wealth  of  the 
nation  directly  as  in  the  hope  of  obtaining  a  greater 
diversity  of  products,  so  that  in  the  end  the  effect 
will  be  to  increase  the  wealth,  indirectly,  by  allow- 
ing for  a  greater  division  of  labour,  and  conse- 
quently for  more  steady  and  efficient  production. 
This  policy  has  nowhere  been  begun  as    ,,  , , 

^         ''  o  jsot  oegxin  as 

a  permanent  one,  but  one  of  its  results  is  >a  permanent 
the  growth  of  powerful  vested  interests  ^^  *^^' 
which  make  for  permanence.  Thus  bounties  are 
paid  directly  from  the  treasury,  or  protection  is 
afforded  to  industries  which  it  is  hoped  will  event- 
ually be  self-supporting,  but  which  are  not  so  at  the 
time.  At  different  times  circumstances  have  caused 
this  policy  to  be  supported  by  different  arguments. 
Practically  all  the  most  important  arguments  have 
been  used  at  different  times  in  the  United  States, 
where  protection  has  prevailed  with  scarcely  a  break 
from  1816  to  1909.  The  oldest  of  those  arguments 
is  known  as  the  "infant  industries  argu-  Argumentsby 
ment."  It  is  urged  that  new,  weak  in-  '"^^l^l^Zlm 
dustries  cannot  hope  to  live  if  subject  supported. 
to  the  competition  of  older  foreign  industries.  At 
the  same  time  it  is  maintained  that  in  case  of  war  it 
would  be  practically  necessary  for  a  country  to  be 
able  to  supply  all  its  own  needs.  This  grows  directly 
into  the  arg-ument  of  List,  which  is  in  the  main  to  the 
effect  that  a  nation's  prosperity,  in  general,  depends 
not  so  much  upon  the  mass  of  wealth  produced  as 
upon  the  greatest  possible  diversity  of  its  industries, 


72  INTRODUCTION  TO  PUBLIC  FINANCE      part  t 

SO  as  to  develop  all  possible  phases  of  its  national 
production.  Just  as  the  human  body  is  healthier 
when  all  the  muscles  are  uniformly  developed  than 
when  a  few  are  abnormally  strong,  so,  it  is  argued,  a 
nation  is  more  truly  prosperous  when  all  its  produc- 
tive forces  are  moderately  active  than  when  its  en- 
tire force  is  expended  in  a  few  lines.  Later  comes 
the  patriotic  or  "  home  market "  argument,  which 
urges  that  th§  home  producer  has  a  claim  on  the 
custom  of  the  home  consumer.  Finally  this  argu- 
ment has  been  developed  in  the  United  States  into 
the  famous  "  pauper  labour "  argument,  and  it  is 
maintained  that  the  home  producer  has  been  enabled 
to  pay  his  workmen  higher  wages  than  the  same 
classes  of  workmen  receive  in  foreign  countries,  on 
account  of  protection,  and  that  to  remove  that  pro- 
tection would  be  to  reduce  the  home  workmen  to 
the  standard  of  life  of  the  foreigners.  This  latter 
argument  is  largely  an  appeal  to  class  interests  for 
votes  and  is  not  wholly  tenable.  The  infant  in- 
dustries argument,  it  is  generally  admitted,  is  incon- 
testable. The  strongest  argument  in  favour  of  the 
continuance  of  this  subsidising  of  industries  has  been 
developed  from  that  of  List.  This  may  be  restated 
somewhat  as  follows :  if  the  productive  energy  of  a 
nation  has  but  a  few  outlets,  as  in  exploiting  natural 
advantages,  there  is  a  great  danger  that  the  nation's 
economic  life  may  become  stagnant.  If,  however, 
production  be  diversified,  even  by  an  artificial  pro- 
cess, it  is  mucli  easier  to  keep  the  current  of  produc- 


CHAP.  Ill      EXPENDITURE  FOR  INDIVIDUALS  73 

tive  energy  in  motion,  allowing  it  to  be  turned  in 
whatever  direction  new  advantages  may  open  up. 

In  England,  which  has  for  many  years  been  re- 
garded as  the  "  classical  home  of  free  trade,"  there 
has  recently  been  a  revival  of  sentiment  in  favour  of 
protection.  But  this  movement  has  not  resulted  in 
establishing  a  protective  system  in  that  country. 
The  reasons  for  the  revival  of  protectionist  senti- 
ment are  the  difficulty  of  furthering  trade  relations 
with  countries  practising  protection  and  whose  home 
markets  are  supplied  by  protected  manufactures, 
and  the  desire  for  closer  trade  relations  with  the 
colonies. 

While  it  may  be  admitted  that  there  is  great  force 
in  the  arguments  in  its  favour,  it  must  be  remembered 
that  protection  is  very  heavy  expenditure,  not  less 
heavy  because  it  is  hard  to  estimate  its  amount. 
There  is  a  practical  limit  set  by  the  wealth  of  the 
people  to  the  possible  amount  of  expenditure  in  this  di- 
rection. If  this  process  places  too  heavy  protection  is 
a  burden  on  the  nation's  annual  wealth  in-  a  heavy  ex- 
crement, the  burden  will  not  be  borne,  ^^"'  *  ^^^* 
and  the  end  defeated.  Again,  if  the  "  protected " 
infant  industries  finally  outgrow  the  need  of  sub- 
sidies, and  fix  prices  by  competition,  the  drain  upon 
the  resources  of  the  country  ceases.  If  they  do  not, 
the  subsidising  process  may  continue  so  long  as  the 
general  mass  of  the  wealth  is  not  thereby  too  seri- 
ously curtailed.  A  nation  may  be  able  to  pay  for 
diversification  of  industries,  just  as  it  may  be  able 


74  INTRODUCTION   TO  PUBLIC  FINANCE      part  i 

to  pay  for  schools,  for  parks,  for  museums,  for  libra 
ries,  etc.  But  the  limit  of  such  expenditure  is  set 
by  what  the  nation  can  afford.  This  limit  is  too 
frequently  overlooked;  it  is  too  often  forgotten  that 
all  protection  is  public  expenditure.  No  "protec- 
tion" is  afforded  unless  the  price  is  raised.  The 
difference  between  the  price  that  would  have  pre- 
vailed and  the  price  that  does  prevail  is  the  amount 
the  nation  spends  for  this  purpose.  This  is  not 
offset  by  any  direct  gain  in  wealth,  and  can  only  be 
justified  by  the  desirability  of  having  a  diversity  of 
industries. 

Sec.  4.  We  now  come  to  those  expenditures  that 
are  treated  as  conferring  a  benefit  divided  between 
the  particular  individual  who  pays  for  what  he  gets, 
and  the  people  as  a  whole  who  pay  in  the  general 
taxes  for  the  general  or  common  benefit.  The  first 
and  oldest  of  these  is  the  expenditure  for  the  courts. 
The  adjudication  of  disputes  between  different  per- 
Expenditure  sons  was  One  of  the  earliest  functions  of 
mlnutrltn  government.  The  payment  of  the  costs 
of  justice.  was  originally  thrown  upon  the  suitors. 
But  modern  governments  conceive  that  it  is  in  the 
common  interest  to  have  justice  universally  ad- 
ministered. Upon  the  general  and  accurate  admin- 
istration of  justice  depends  in  great  measure  the 
prosperity  of  business.  But  either  as  a  preventive 
of  too  frequent  litigations  or  on  account  of  the 
special  benefit  supposed  to  accrue  to  the  suitor,  the 
costs  are  divided,  and  one  part  paid  by  the  people, 


CHAP.  Ill      EXPENDITURE   FOR  INDIVIDUALS  75 

the  Other  —  a  minor  i)art  —  by  the  suitor.  In  criminal 
cases  the  whole  cost  practically  falls  on  the  State;  in 
civil  cases  the  attempt  is  generally  made  to  assess 
the  cost  upon  the  party  at  fault.  In  the  United 
Kingdom,  the  cost  of  the  judicial  system  was,  in 
1902,  £797,866  including  £133,542  for  the  land 
commission  in  Ireland.  Of  this  total  £350,400  was 
for  Ireland  alone.  A  large  part  of  the  local  admin- 
istration of  justice  in  England  is  rendered  without 
emolument  by  the  Justices  of  the  Peace.  The  United 
States  federal  expenditure  for  this  purpose  was,  in 
1902,  $7,350,000.  The  commonwealths,  the  counties, 
and  the  cities  spend  about  $40,000,000  more,  making 
a  total  of  over  $47,000,000.  Besides  the  mere  decid- 
ing of  disputes  and  of  criminal  cases,  the  judicial 
departments  perform  other  legal  functions  of  impor- 
tance, as,  for  example,  the  probating  of  wills,  the 
disposing  of  property  of  intestates,  etc.  Somewhat 
similar  legal  functions  are  performed  for  the  special 
benefit  of  the  individual  citizens  by  the  administrative 
branches  of  the  government,  as  registration  and 
legalising  of  deeds,  mortgages,  marriages,  and  other 
contracts,  the  granting  and  registration  of  copyrights, 
trade-marks,  patent  rights,  corporation  rights,  etc. 

In  the  United  States  the  courts  have  developed  a 
number  of  quasi-legislative  and  administrative  func- 
tions of  great  importance.  As  the  interpreters  of 
the  federal  and  commonwealth  constitutions,  they 
have  had  to  meet  new  conditions,  and  indicate  the 
bearing   of  the   constitutions   thereon.     They   have 


76  INTRODUCTION   TO  PUBLIC  FINANCE       part  i 

often  been  called  upon  to  interpret  the  meaning  oi 
constitutional  customs  that  have  grown  up  outside  of 
the  written  documents,  and  have  in  this  way  given 
those  customs  a  certain  degree  of  legal  prominence. 
They  were  formerly  in  some  of  the  commonwealths 
(following  an  old  English  custom)  allowed  to  deter- 
mine the  local  tax  levy  or  apportionment.  Quite 
recently,  by  the  use  of  injunctions,  they  have  exer- 
cised a  sort  of  administrative  control  over  industry, 
especially  as  affects  the  relations  of  employers  and 
employees  in  industrial  monopolies  of  public  impor- 
tance, as,  for  example,  common  carriers.  In  the  con- 
trol of  municipal  corporations,  both  by  punishing 
illegal  acts  and  compelling  due  compliance  with  dis- 
cretionary duties,  they  have  largely  performed  the 
functions  exercised  by  the  administrative  depart- 
ments in  Europe.^  In  all  this  work  they  are  con- 
sidered as  acting  for  the  common  benefit. 

Sec.  5.  Other  functions  that  are  similarly  treated 
need  but  to  be  enumerated.  Among  them  are  the 
laying  out  and  grading  of  streets,  building  of  sewers 
for  the  benefit  of  all  the  citizens,  and  the  special 
Betterment  of  "  betterment "  of  the  property  of  abut- 
property,etc.  ^[^g  landowners.  The  division  made 
here  is  generally  that  the  first  cost  is  assessed  to  the 
specially  benefited  persons,  the  subsequent  costs, 
maintenance,  etc.,  to  the  people,  generally.  The 
supply  of  water  is  similarly  treated  in  many  cities. 
One  of  the  best  examples  of  this  sort  of  expenditure 
1  See  Goodnow,  Municipal  Home  Bule. 


CHAP.  Ill      EXPENDITURE  FOR   INDIVIDUALS  77 

is  that  of  the  post-office,  as  managed  in  the  United 
States.  This  service  is  almost  entirely  treated  as 
conferring  a  special  benefit  on  the  users.  A  part  of 
the  cost  of  the  distribution  of  newspapers  within  the 
county  in  which  they  are  published  is  treated  as  a 
public  benefit.  In  some  countries  the  post-office  is 
so  managed  as  to  yield  a  surplus,  in  which  case  it 
passes  into  class  four. 

Sec.  6.  Expenditures  of  class  four  are  part  of 
the  gross  expenditure  only.  When  a  State  spends 
money  in  wages  and  in  the  purchase  of  a  plant  and 
raw  materials  for  the  production  of  porcelain  and 
the  like,  it  expects  to  get  it  all  back  g^^^g 
again  from  the  sale  of  the  commodities,  industry. 
The  same  is  true  of  a  city  maintaining  a  gas  plant,  of  a 
State  railroad,  etc.  Originally,  the  State  ipade  use  of 
public  lands,  forests,  mines,  etc.,  as  a  source  of  income, 
but  now  there  are  a  great  many  industries  and  enter- 
prises which  the  State  conducts  more  for  a  public  pur- 
pose than  for  the  gain  to  the  public  treasury.  A  city 
does  not  operate  its  street  railways  primarily  as  a 
source  of  income,  but  to  guarantee  the  citizen  good 
and  cheap  service.  Hence  the  gross  expenditure  for 
this  purpose  is  a  very  important  item.  It  is  growing 
to  be  more  and  more  so  as  time  goes  on. 

Some  of  the  more  important  industries  that  the 
State  carries  on  are  for  the  purpose  of  supplying 
itself  with  certain  commodities,  as  arms,  Manufacture 
ammunition,    war-ships,    and    the    like,   of  supplies. 
Such   industries   are   carried   on   from  the    highest 


78  INTRODUCTION   TO  PUBLIC  FINANCE       part  i 

branches  of  the  government  down  to  the  lowest. 
We  find,  for  example,  many  American  towns  supply- 
ing a  part  of  the  support  of  the  inmates  of  its  public 
institutions  by  cultivating  the  lands  of  the  poor- 
farms. 

Some  of  the  most  striking  instances  of  such  in- 
dustrial expenditure  are  connected  with  communi- 
cation and  transport,  and  with  those  industries  the 
management  of  which,  on  account  of  the  tendency 
to  monopoly,  is  frequently  put  into  public  hands. 
Examples  of  this  are  numerous  among  those  already 
mentioned.  Many  industries  have  been  at  different 
times  and  places  so  managed  as  to  cost  more  than 
they  brought  in.  That  is,  they  have  resulted  in  a 
net  deficit,  not  a  net  profit.  They  thus  pass  into 
class  three. 

A  rather  significant  list  of  enterprises  has  in 
modern  times  been  entered  upon  by  the  State,  which 
might  be,  but  are  not,  managed  so  as  to  yield  a 
revenue  that  offsets  their  cost.  These  are  museums, 
libraries,  parks,  baths,  and  the  like.  They  belong 
under  class  one. 


PAKT   II  . 

PUBLIC  REVENUES 


CHAPTER   I 

THE   CHARACTER   AND   CLASSIFICATION   OF    PUBLIC 
REVENUES 

Section  1.  German  writers  on  public  finance 
generally  begin  the  discussion  of  revenues  with  the 
statement  that  the  State  requires  services  The  state  re- 
and  commodities.     The  services  are  fur-  quires  services 

.   .  .  .     .   .     ■  and  commodi- 

nished  by  the  citizens  ;  in  primitive  com-  ties. 
munities  freely,  by  all,  in  virtue  of  membership 
in  the  State,  later  by  particular  ones  who  are 
paid  for  them.  The  commodities  or  wealth  re- 
quired may  be  produced  by  the  State  or  taken  from 
the  citizens.  In  the  ancient  primitive  community, 
services  are  rendered  by  the  citizens  as  their  proper 
contribution  to  the  State.'  The  commodities  needed 
are  for  the  most  part  furnished  by  the  individuals 
without  any  recognition  of  a  transfer  of  ownership 
to  the  State.  The  division  of  labour  necessary  for 
the  successful  administration  of  more  complex  affairs 
of   the    modern    State  demands  a  separation  of  the 

79 


80  INTRODUCTION   TO  PUBLIC  FINANCE     part  n 

persons  permanently  in  the  service  of  the  State 
from  the  other  classes.  These  must  then  be  sup- 
ported from  somewhere,  and  in  classical  times  this 
is  accomplished  by  giving  the  State,  or  what  is  the 
same  thing  in  classic  thought,  its  special  officers,  the 
income  from  certain  sources,  as  mines  or  productive 
enterprises,  and  taxes  upon  tributary  peoples,  or 
certain  inferior  classes  of  citizens.  Out  of  these 
funds  the  public  officers  were  supported,  and  those 
in  the  service  of  the  State  who  were  paid  for  their 
services  were  maintained. 

Again,  in  the  middle  ages,  feudalism  furnished  a 
mode  of  support  for  public  officers  by  giving  them  a 
certain  control  over  land  and  its  occupants.  This 
was  a  means  which,  without  the  use  of  money,  pro- 
Feudaiism  ^^^^^  services  and  commodities  for  the 
provides/or  public  needs. ^  But  later  as  money  be- 
IhlTtlte  came   more   plentiful,   and   in    ordinary 

without iheuse  transactions   payments   in   kind   and   in 

^^^^^'  services  were  commuted  into  payments  in 
money,  the  government  in  turn  commuted  services 
due  into  money  payments.  At  the  same  time,  lands 
originally  conveyed  to  public  officers  in  considera- 
tion of  their  public  services,  and  to  enable  them 
to  perform  those  services,  passed  absolutely  into 
their  control  and  were  treated,  in  part  at  least, 
as  their  private  property,  and  the  services  and  com- 
modities they  yielded  became  the  private  income  of 
those  individuals  and  their  families.  But  although 
1  Maine,  Early  Law  and  Custom,  p.  148. 


CHAP.  I     THE  CHARACTER   OF  PUBLIC  REVENUES     81 

the  revenues  from  the  domains,  retained  in  this  same 
way  by  those  families  which  became  the  sovereigns, 
were  still  applied  to  public  expenses,  they  soon  be- 
came insufficient,  as  the  State's  functions  grew,  and 
other  resources  were  sought.  In  the  mad  scramble 
for  public  revenues,  old  rights  to  dues  and  services 
were  tenaciously  retained  by  rulers  or  their  officers. 
Especially  were  the  claims  to  military  and  similar 
general  services  held.  These  claims,  too,  were  finally 
commuted  into  money  payments,  which  became  com- 
pulsory just  as  the  services  from  which  they  were 
derived  had  been  compulsory. 

The  names  used  for  the  first  revenues,  which 
differed  from  the  receipts  from  domains  and  the 
customary  services,  show  very  distinctly   ,„,      ,    , 

•^  J  J     The  voluntary 

the  voluntary  character  of  the  payments,  character  of 
They  are  called  beggings,  requests,  gifts  f^/^ZZ" 
(heden^  petitiones^  benevolences^  dona),  or  receipts  from 
from  the  point  of  view  of  the  assistance  ^^"*^*- 
given,  aids  (^aide,  steuer)}  With  the  gradual  growth 
of  the  needs,  for  which  these  demands  were  made, 
into  permanent  needs,  with  the  further  centralisation 
and  concentration  of  the  public  functions,  with  the 
neglect  of  public  duties  by  the  feudal  lords,  and  by 
the  quasi-public  officers  quartered  on  the  land,  and 
with  the  consequent  performance  of  these  duties  by 
the  government,  the  demands  upon  the  people  be- 
came permanent  and  compulsory. 

Sec.  2.   Since  the  emergence  of  the  monarchica' 
1  Seligman,  Essays,  pp.  6-7. 


82  INTRODUCTION   TO  PUBLIC  FINANCE     part  h 

State  from  feudalism,  the  trend  of  public  finance  lias 

been  directed  by  the  growth  of  constitutionalism,  — 

or  the  representation  of  the  people  in  the  government. 

As  the  whole  advance  of  this  movement  turned  upon 

the  success  of  the  people  in  obtaining  the  control  of 

The  growth  of  ^^^^  pursc,  it  is  evident  that  the  resulting 

constitution-     changes    in   the    financial    system    must 

in  uniformity  ^ave   been    very    important.     The    long 

in  the  revenue  history  through  which  the  different  rev- 
systemsofthe  -^        n 

different  coun-  enues  have  passed,  the  necessity  or  con- 
'^^'**-  stant  compromise  between  the   different 

interested  parties,  and  the  various  changes  made  neces- 
sary by  the  growth  in  the  economic  life  of  the  world,  all 
these  have  left  modern  States  with  a  most  confused 
jumble  of  revenues.  Yet  with  all  the  irregularities 
and  anomalies  that  can  be  found  in  the  revenues  of 
any  modern  State,  there  is  still  in  every  case  a  more 
or  less  clearly  traceable  systematic  development. 
This  growth  of  system  is  clearly  due  to  the 
work  of  the  representatives,  in  whose  hands  the 
development  of  constitutional  government  finally 
placed  the  control  of  the  collection  and  spending  of 
the  public  money.  As  these  representatives  realised 
the  need  of  revenues,  they  naturally  sought  for 
some  principles  of  right  and  justice  to  guide  them 
in  the  choice  of  sources.  The  result  has  been  a 
partial  uniformity  in  the  systems  of  the  different 
countries. 

It  should  not,  however,  be  imagined  that  this  uni- 
formity is  very  great,  nor  that  the  systems  of  the 


CHAP.  I      THE  CHARACTER    OF  PUBLIC  REVENUES      83 

different  countries  are  alike  in  details.  But  some- 
what the  same  fundamental  ideas  seem  to  underlie 
all.  There  are  also  great  differences.  Thus  one 
country  chooses  to  obtain  the  larger  part  of  its  reve- 
nues from  a  tax  not  used  at  all  in  another.  Histor- 
ical practices  and  differences  in  the  frame   „,. 

^  .  Slight  differ- 

of  government  necessitate  modifications,  ences  in  de- 
even  of  the  same  principle.     That  bug-  '"*^** 
bear  of  the  student  of  public  finance,  practical  ex- 
pediency,   which   has   ruined   many   a   fine   theory, 
works  in  the  most  astonishing  ways  to  prevent  the 
execution  of  approved  principles. 

Sec.  3.  The  uniformity  above  noted  came  about 
as  a  natural  result  of  the  general  search  by  the 
agents  of  constitutional  government  for  some  good 
reason  why,  in  each  case,  the  particular  person  con- 
tributing should  be  called  upon  to  do  so.  As  the 
representatives  of  the  people,  they  naturally  had  to 
satisfy,  in  some  way,  the  reasonable  desire  of  the 
people  for  some  clearly  defined  method  of  apportion- 
ment. As  it  is  generally  hard  enough  to  convince 
men  of  the  need  of  contributing  anything,  the  plea 
put  forth  must  be  a  strong  one.  If  we  confine  our 
attention,  for  the  purposes  of  illustration,  to  taxes 
alone,  which  are  the  hardest  of  all  revenues  to 
justify,  we  can  see  more  clearly  how  the  necessity 
of  thus  showing  good  reasons  led  to  uni-  Different 
formity.  It  is  evident  that  if  the  repre-  f^^l'j^ajca. 
sentatives  had,  for  instance,  informed  tion  of  taxes. 
their  constituents  that  "  taxes  are  one-sided  transfers 


84  INTRODUCTION  TO  PUBLIC  FINANCE     part  il 

of  economic  goods  or  services,"  i  they  would  have 
had  considerable  difficulty  in  getting  consent  to  any 
taxes.  But  when  they  announced,  "  taxes  are  paid 
in  return  for  the  benefits  conferred  upon  you  by  the 
government,"  it  was  easier  to  collect  them.  When 
they  proceeded  to  assess  taxes  on  the  basis  of  a  more 
or  less  definite  attempt  to  measure  the  benefit  con- 
ferred, or  where,  in  the  nature  of  things,  an  actual 
measurement  was  impossible  on  some  other  basis  of 
supposed  equality,  they  clearly  had  a  very  good  case 
to  present  to  their  constituents.  It  requires  but  the 
slightest  knowledge  of  the  history  of  constitutional 
legislative  bodies  to  prove  conclusively  that  such 
was  the  process  of  reasoning.  And  this  fully  ac- 
counts for  the  similarity  of  the  systems  of  various 
countries. 

Whenever  it  was  perfectly  clear  that  a  certain 
function  conferred  a  special  benefit  on  an  individ- 
ual citizen,  the  charge  was  made  on  him,  and  those 
persons  not  so  clearly  benefited  were  wholly  or  par- 
tially exempt.  Thus  we  have  the  practice  of  taking 
tolls  from  persons  using  the  roads,  of  collecting  fees 
from  the  suitors  at  court,  or  making  a  sale  of  some  priv- 
ilege or  commodity  to  the  citizens  for  a  price,  as  in 
the  case  of  granting  a  monopoly,  or  the  sale  of  manu- 
factured wares,  or  of  lumber,  or  ore  from  the  domains. 
But  many  of  the  mor^  important  functions  do  not 
result  so  clearly  in  a  special  benefit  to  the  individual, 
and  recourse  is  had  to  some  other  mode  of  justifica- 
*  Part  of  the  definition  of  taxes  by  Professor  Ely,  pp.  6,  7. 


CHAP.  I     THE  CHARACTER   OF  PUBLIC  REVENUES     85 

tion.  At  first,  naturally,  the  older  ideas  are  devel- 
oped. The  services  traditionally  due  from  the 
citizen  to  the  State,  of  which  that  of  military  service 
is  the  most  prominent  example,  are  recalled  and  ap- 
pealed to.  It  is  claimed  that  money  should  be  given 
in  commutation  of  these  services.  Then  the  ground 
is  shifted  again  and  again,  and  many  apparently 
different  reasons  are  advanced.  But  in  all  these 
changes  one  thing  is  clear,  —  the  shifting  of  argu- 
ment is  made  in  order  to  enable  the  use 

»  Changes  in 

ot  some  new  measure  of  the  amount  of  the  forms  of 
taxation,   and   at   basis   the  iustification  ^^''^^'^ion  are 

due  to  the 

remains  practically  the  same.    The  citizen  search  for  new 
is  asked  to  pay,  because  he  shares  in  the  ^«««"^««' 
benefits  common  to  him  and  his  fellows.     But  this 
common   benefit   does   not    suggest   any   particular 
measure. 

Sec.  4.    Another  point  of  similarity  between  dif- 
ferent nations  must  be  studied  historically;  that  is 

the  feature  of  compulsion.     This  feature   ^ 

^  Compulsion 

is  old  and  universal.  It  is,  perhaps,  older  a  universal 
than  any  one  of  the  nations  and  began  in  •^^"'"''®- 
that  feudal  system  from  which  they  emerged.  The 
citizen  had  to  be  compelled  to  render  his  service  to 
the  State,  whenever  the  special  benefit  to  him  was 
not  clear.  That  feature  the  most  advanced  consti- 
tutional governments  have  retained.  There  have,  to 
be  sure,  been  instances  where  States,  and  especially 
cities,  have  had  recourse  to  voluntary  contributions 
to  meet  the  expenses  giving  a  special  benefit.     But 


86  INTRODUCTION   TO  PUBLIC  FINANCE      part  ii 

these  soon  passed  into  compulsory  contributions.  A 
fine  example  of  the  development  of  a  voluntary  con- 
tribution into  a  tax  is  found  in  the  English  poor-rate. 
In  the  twenty-seventh  year  of  the  reign  of  Henry 
VIII.,  1536,  collections  were  made  for  the  impotent 
poor  (voluntary).  In  the  first  Edward  VI.,  1547, 
bishops  were  authorised  to  prosecute  all  who  refused 
to  contribute  for  this  purpose  (compulsion  enters). 
In  the  fifth  Elizabeth,  1563,  the  justices  of  the  peace 
were  made  judges  of  what  constituted  a  reasonable  con- 
tribution (compulsion  as  to  the  amount).  And 
from  the  fourteenth  Elizabeth,  1572,  regular  com- 
pulsory contributions  were  levied,  and  so  they  have 
continued. 

Sec.  5.    We  have  already  classified  expenditures 
according  to  the  character  of  the  benefit  conferred.^ 

Now   the  almost  uniform  practice   is  to 
Classification 
of  revenues       Collect  compulsory  revenues  from  all  the 

according  as     citizens     for     those     expenditures     that 

they  are  justi- 
fied by  com-      confer   a    common    benefit,    or  one   that 

mon  or  special  jg   g^   treated;    then    to   collect   special 

benefit. 

compulsory  revenues  for  a  part   of  the 

cost  from  those  persons  regarded  as  specially  bene- 
fited by  expenditures  of  class  three ;  while  the 
revenues  for  meeting  the  fourth  class  of  expendi- 
tures are  raised  by  the  sale  of  the  commodities  or 
services. 

Professor  Seligman  finds  that  there  are  three  dis- 
tinct classes  of  revenues,  each  resting  on  a  different 
1  See  Part  I.,  Chap.  I.,  sec.  6. 


CHAP.  I      THE  CHARACTER    OF  PUBLIC  REVENUES      87 

justification.  1  The  first  of  these  three  we  shall  call 
taxes.  This  is  a  slightly  narrowed  use  of  the  term. 
In  the  broadest  sense  an  exercise  of  the  taxing  power 
of  the  State  occurs  whenever  a  compulsory  contribu- 
tion of  wealth  is  taken  from  a  person,  private  or  cor- 
porate, under  the  authority  of  the  public  powers. 
But  such  a  broad  definition  of  taxes  would  include, 
also,  the  charges  for  expenditures  of  the  third  class 
levied  to  pay  the  cost  or  part  of  the  cost  of  a  special 
service.  As  these  are  certainly  different  from 
those  charges  levied  to  meet  the  expenditures  con- 
ferring a  common  benefit,  it  is  necessary  to  adopt 
the  narrower  definition.  In  this  sense,  then,  taxes 
are    general     compulsory     contributions 

^  r  J  Taxes  defined. 

of    wealth   levied    upon    persons,   natu- 
ral  or   corporate,   to  defray  the  expenses   incurred 
in  conferring  a  common  benefit  upon  the  residents 
of  the  State.     A  tax  is  justified,  but  not  necessarily 
measured,  by  the  common  benefit  conferred. 

When  a  distinct  attempt  is  made  to  levy  the 
charge  only  where  a  traceable  or  assumed  special 
benefit  is  conferred,  and  to  make  it  cover  the  cost, 

1  See  Seligman,  "Classification  of  Revenues,"  in  the  Quarterly 
Journal  of  Economics,  April,  1893,  and  April,  1895  ;  Assays,  Chap. 
IX.  In  my  opinion  Professor  Seligman  has  not  improved  his  clas- 
sification by  the  refinements  introduced  in  the  second  article.  Nor 
is  the  necessity  for  distinguishing  between  fees  and  special  assess- 
ments clear.  Special  assessments  are  a  kind  of  fee,  even  within 
the  terms  of  the  professor's  definition  of  fees.  Nothing  is  gained 
by  raising  classes  logically  secondary  in  character  to  first  place. 
It  is  hoped  that  the  simple  general  outlines  of  Professor  Seligman's 
classification,  as  given  in  the  text,  may  find  general  acceptance. 


88  INTRODUCTION   TO  PUBLIC  FINANCE     part  r 

or  a  part  of  the  cost  thereof,  the  compulsory  pay- 
ment is  a  fee.  In  the  broadest  sense  fees  are  taxes, 
but  they  are  not  taxes  in  the  narrower  sense  defined 
above.  They  compose  a  large  and  important  class  by 
themselves.  A  fee  has  a  different  justification  from 
a  tax.  A  fee  nevfer  exceeds  the  cost  of  the  special 
service  rendered.  A  charge  for  a  special  benefit 
that  exceeds  the  cost  is  best  regarded  as  consisting 
of  two  parts :  one  a  fee,  the  other  a  special  tax.  A 
fee  may  be  defined  as  a  compulsory  contribution  of 
wealth  made  by  a  person,  natural  or  cor- 

Fee&  defined.  . 

porate,  under  the  authority  of  the  public 
powers  to  defray  a  part  or  all  of  the  expenses  in- 
volved in  some  action  of  the  government,  which, 
while  creating  a  common  benefit,  also  confers  a 
special  benefit,  or  one  that  is  arbitrarily  so  regarded. 
The  third  category  of  revenues  has  been  called 
"  contractual "  revenues,  or,  by  the  United  States 
Census  Bureau,  "  commercial  "  revenues.  They  are 
more  specifically  designated  by  Professor  Seligmari 

as  "prices."     But  there   are   good  rea- 

Rates  defined.  r  n        '  i 

sons  for  preferring  the  term  "  rates  as 
the  general  designation  of  the  class.  They  are  the 
charges  made  when  the  government  performs  some 
service,  or  supplies  some  commodity,  in  substantially 
the  same  manner  as  that  service  would  be  performed, 
or  the  commodity  supplied  and  sold,  by  private  enter- 
prise. Thus  we  speak  of  railway  rates,  water  rates, 
rates  for  gas  or  electrical  current,  telegraph  and  tele- 
phone rates,  etc.     At  the   same   time  we  speak  of 


CHAP.  I      THE  CHARACTER   OF  PUBLIC  REVENUES     89 

the  "price"  of  Gobelin  tapestry,  or  of  Sevres  ware. 
While  common  usage  is  not  altogether  consistent, 
the  charges  made  b}^  a  monopoly  are  more  often  called 
rates  than  prices.  The  government  generally  estab- 
lishes a  monopoly  whenever  it  takes  over  any  industry 
and  refuses  to  allow  its  citizens  to  "compete  with  it. 
Industries  in  which  it  allows  competition  are  rather 
unusual  and  exceptional.  Hence  the  term  "rate" 
seems  preferable  to  "price,"  and  will  be  adopted  in 
this  work.i 

If  the  State  has  a  monopoly,  it  may  act  as  a  pri- 
vate person  would  and  take  "all  the  traffic  will 
bear,"  or  it  may  forego  a  part  of  the  possible  gain, 
and  the  payment  becomes  or  approaches  a  fee.  If 
the  State  has  no  monopoly,  it  must,  perforce,  act  as 
an  individual  would,  subject  to  competition.  Every 
civilised  country  has  these  three  categories  of  reve- 
nues, and  combinations  thereof,  and  no  more  than 
these.  Every  civilised  country  recognises  the  same 
justification  for  each  contribution.  Every  govern- 
ment appeals  to  the  same  motives  to  induce  the  pay- 
ment of  each  class.  In  the  case  of  the  first  two 
classes  the  motive  is  compulsion,  in  the  last  the 
government  withdraws  and  allows  the  interest  of  the 
individual  to  bring  him  forward  and  induce  him  to 

1  The  term  "rate"  was  not  used  in  this  sense  in  the  first  edition 
of  this  book,  nor  has  it  yet  received  general  recognition  in  theo- 
retical works.  But  it  is  not  infrequently  so  used  in  official  docu- 
ments. It  should  not  be  confused  with  the  English  designation  of 
local  taxes  which  are,  in  that  country,  generally  spoken  of  as  ^at 
excellence.  "  the  rates." 


90  INTRODUCTION   TO  PUBLIC  FINANCE     part  n 

make  the  contribution.  This  class  has  been  called 
voluntary.  If  this  term  meant  merely  the  absence 
of  compulsion,  —  the  spontaneity,  as  it  were,  of  the 
contribution,  —  it  would  be  satisfactory.  But  gener- 
ally there  is  the  danger  of  confusion  arising  from  the 
implication  in  the  term  that  the  contribution  is  with- 
out return,  of  the  nature  of  a  gift.  Hence,  in  order 
to  show  the  character  of  the  payment,  Professor 
,      Seliffman   has    called  it    "contractual." 

Rates  may  be  o 

called  con-  There  are  serious  objections  to  this  term 
tractuai  reve-    ^^       although  it  is  of  such  a  character 

nues,  or  <=* 

commercial       as  to  admit  of  a  technical  application  very 

revenues.  ^^^-^^^       g^^    .^^    j.^^    ^^   ^    1^^^^^^.    ^^^  ^^^ 

sake  of  uniformity  we  will  adopt  it.  There  is  less 
objection  to  the  term  "  commercial "  revenues,  used 
by  the  United  States  Census  Bureau.  But  up  to  the 
present  time  the  term  has  not  been  commonly  adopted. 
Sec.  6.  Thus  far,  for  sake  of  simplicity,  and  not  to 
depart  from  the  usage  of  other  writers,  we  have  con- 
sidered the  revenues  as  practically  identical  with  the 
money  flowing  into  the  treasury.  Services  rendered 
Compulsory  without  pay  do  not  belong  to  our  subject. 
revenues  are     3^^  Still  it  is  not  QUite  accuratc  to  idcu- 

derivative  ;  .  „ 

contractual  tify  the  public  rcveuues  with  the  money 
are  not.  ^jj^t  flovvs   into  the  treasury.     Money  is 

here,  as  in  private  households,  but  the  representative 
of  wealth.  When  the  government  compels  its  sub- 
jects to  pay  contributions  of  classes  one  and  two, 
taxes  and  fees,  it  does  so  in  order  to  obtain  control 
of  wealth  which  it  takes  from  the  people  to  consume 


CHAP.  I     THE  CHARACTER    OF  PUBLIC  REVENUES     91 

for  a  public  purpose.  But  in  the  case  of  contractual 
revenues  the  matter  is  quite  different.  Here  the 
government  simply  sells,  for  money,  wealth  :  material 
things,  privileges,  or  services  which  it  has  brought 
into  existence.  The  transaction  is  a  simple  sale. 
This  is  partly  true  of  some  fees.  The  money  that 
flows  into  the  treasury  simply  takes  the  place  of 
actual  wealth  already  created  or  being  created  by 
the  government.  The  important  thing  to  note  is 
that  rates  result  in  little  or  no  increase  '  in  the 
amount  of  wealth  in  the  hands  of  the  government, 
unlike  the  other  cases,  but  represent  a  mere  change 
in  the  form  of  the  wealth  already  owned.  It  is  not 
wealth  taken  from  the  people  to  be  consumed  by  the 
government ;  but  wealth  created  by  the  government 
is  turned  into  money  so  that  it  may  be  more  con- 
veniently used.  Nothing  is  taken  from  the  people, 
for  they  receive  back  the  equivalent  of  their  money 
in  wealth,  over  which  they  then  have  control  as 
owners.  In  the  case  of  compulsory  compuUcyry 
revenues  the  matter  is  different  because  revenues  leave 
they  receive  back  nothing  tangible,  but  \^ZsZnr 
simply  enjoy  the  common  or  special  position  as 
benefits  of  good  government.  These  tZfJZhis 
benefits  are  of  the  same  character  exactly  wealth.  Con- 
as  the  benefits  which  accrue  to  the  in-  ^^^eiy  repre- 
dividual    when    he    consumes    his   own   sent  a  change 

t   1  r-w^i  1       J*        5?  T      i.     inform. 

wealth.     They  are  "  reproductive,    it  at 

all,   in    the    same    sense   that    the    consumption    of 

bread  by  the  worker  is  reproductive.     That   is   no 


92  INTRODUCTION  TO  PUBLIC  FINANCE     part  ii 

sense  at  all.  Just  as  the  aim  of  all  production  in 
the  economic  world  is  consumption  or  tjie  satisfaction 
of  wants,  so  the  end  and  aim  of  the  compulsory  col- 
lection of  revenues  is  consumption  by  the  State. 
Sometimes,  to  be  sure,  the  government  turns  these 
funds  into  permanent  forms  of  wealth  which  are 
slowly  consumed ;  as,  for  example,  roads.  Some- 
times, too,  the  government  adds  to  the  effective 
power  of  the  wealth  before  consuming  it,  or  uses  it 
to  produce  new  wealth ;  but  yet,  so  far  as  the  indi- 
vidual is  concerned,  he  has  parted  with  his  property 
in  a  way  which  leaves  him  benefited,  to  be  sure,  but 
in  exactly  the  same  position  as  when  he  spends  the 
same  amount  for  some  gratification.  Quite  the  con- 
trary is  his  position  when  he  buys  a  piece  of  china 
made  by  the  government,  for  then  he  has  the  equiv- 
alent of  his  money.  The  government,  too,  is  no 
richer  than  before,  but  has  its  wealth  in  a  form 
which  better  suits  it.^  Frequently  the  government 
uses  the  wealth  created  directly  without  first  turn- 
ing it  into  money.  This  wealth  is  as  much  a  part  of 
the  revenues  as  any  that  is  sold. 

We  may  now  change  our  terminology  slightly, 
and  say  that  there  are  three  sources  of  public  reve- 
nues :  the  first  is  collected  from  all  the  citizens 
by  compulsion,  on  the  ground  that  certain  expen- 
ditures are  necessary  and  confer  a  common  benefit 
upon  all ;  these  are  taxes.  The  second  is  collected 
by  compulsion  from  certain  persons  on  the  ground 
^Cf.  Stein,  Finanzwissenschaft,  II.,  138. 


CHAP.  I     THE  CHARACTER    OF  PUBLIC  REVENUES     93 

that  they  are  specially  benefited  by  some  expendi- 
tures ;  these  are  fees.  And  lastly,  the  State  creates 
wealth  for  itself.  The  wealth  thus  created  consti- 
tutes a  part  of  the  revenue  of  the  government  be- 
longing to  the  third  class.  This,  whether  sold  or 
not,  is  contractual  revenue  or  commercial  revenue, 
and  is  received  in  the  form  of  rates. 

Sec.  7.  One  or  two  minor  matters  have  to  be  no- 
ticed and  our  classification  is  complete.  Sometimes 
States  receive  gifts,  generally  for  some 

.    T  rri,  -     Other  kinds  of 

special  purpose.     These  are  now  rare  and  revenues, 
unimportant.     The   special    purpose    is  d^M  rever- 

n  T  .    •  1       . 1  ,    sions,  by  emi- 

usually  more  or  less  outside  the  general  nent  domain, 
functions  of  the  State.  Sometimes  the  fines,andpen- 
State  receives  property  by  reversion-,  or 
takes  property  which  has  no  apparent  owner.  This, 
too,  is  an  insignificant  category.  The  State  may 
exercise  the  right  of  eminent  domain  and  take  prop- 
erty for  some  purpose.  Generally  speaking,  it  re- 
stores an  equal  amount  of  some  other  kind  of  wealth, 
so  this  transaction  results  in  no  net  revenue.  The 
State  is  the  recipient  of  not  insignificant  sums  from 
fines  and  penalties  inflicted  under  the  penal  power. 
These  are  compulsory  contributions  levied  with  an 
intent  to  injure,  and  differ  materially  from  the  other 
categories.  Their  nature  is  clear,  and  they  will  re- 
ceive no  further  attention.  All  the  receipts  of  the 
State  come  under  one  or  the  other  of  these  cate- 
gories. 


94  INTRODUCTION   TO  PUBLIC  FINANCE      part  ii 


APPENDIX 

THE  UNITED   STATES  CENSUS  BUREAU'S  CLASSIFICA- 
TION  OF   REVENUES 

At  the  end  of  Chapterl.,  in  Part  I.,  of  this  work  we  inserted  an 
appendix  concerning  the  United  States  Census  Bureau's  classifica- 
tion of  expenditures.  The  present  appendix  continues  the  one 
referred  to  and  covers  what  the  Census  Bureau  has  to  say  in  ex- 
planation of  its  classification  of  revenues.  For  introductory 
explanation  of  the  importance  of  this  classification  see  supra^  loco 
cit. 

"Revenues 

"  General  revenues.  —  The  general  revenues  of  nations,  states, 
and  municipalities  consist  of  those  compulsory  or  voluntary  con- 
tributions of  private  individuals  or  corporations,  levied  or  collected, 
to  defray  the  general  cost  of  government,  and  not  conditional  upon 
the  performance  of  any  specific  service  to  the  individual  contributor. 

"  Commercial  revenues. — The  commercial  revenues,  or  income, 
of  nations,  states,  and  municipalities  are  those  derived  in  connec- 
tion with  the  exercise  of  their  commercial  functions ;  they  are 
classified  according  to  the  character  of  the  transactions  and  activi- 
ties from  which  they  originate.  They  are  here  divided  into  three 
subclasses,  to  which  are  applied  specific  designations  of  industrial 
investment  and  special-service  income. 

"  (1)  Industrial  income  is  the  total  gross  earnings  of  the  indus- 
tries of  nations,  states,  and  municipalities. 

"  (2)  Investment  income  is  the  total  income  of  the  investments 
of  nations,  states,  and  municipalities. 

"  (3)  Special-service  income  is  the  income  derived  by  nations, 
states,  and  municipalities,  from  special  services  performed  or  pro- 
vided by  departments  or  oflBces  other  than  industries.  It  is  of  two 
distinct  classes,  according  as  it  is  available  for  meeting  special-ser- 
vice expenses  and  special-improvement  outlays. 

*'  Corporate  Inte^iests 

**  The  corporate,  receipts  of  nations,  states,  and  municipalities  are 
the  net  receipts  from  revenues  and  from  loans  which  increase  in- 
debtedness.    By  net  receipts  is  meant  the  receipts  from  the  sources 


CHAP.  I     THE   CHARACTER   OF  PUBLIC  REVENUES     95 


ica- 


mentioned,  after  deductions  for  refunds  and  all  kindred  dupl 
tions  by  counterbalancing  payments  and  debits  classed  as  'tempo 
rary. ' 

"  Corporate  receipts  are  classified  by  the  Bureau  of  the  Census 
in  five  main  groups,  as  follows  :  Receipts  from  (1)  general  revenues, 
(2)  industrial  income,  (3)  investment  income,  (4)  special  income' 
and  (5)  debt  obligations. 

'' Beceipts  from  general  revenues. —ThQ  receipts  from  general 
revenues  comprise  receipts  from  taxes,  licenses,  permits,  penalties, 
fines,  forfeits,  subventions,  grants,  donations,  gifts,  and  miscellane- 
ous general  revenues. 

"In  the  statistical  presentation  of  revenue  receipts  the  Bureau 
of  the  Census  has  introduced  —  principally  for  mechanical  reasons, 
to  facilitate  the  ready  presentation  of  all  the  facts  —  certain  classi- 
fications of  revenues  differing  from  those  employed  by  Professor 
Plehn  in  his  analysis  of  state  revenue  systems.  The  taxes  referred 
to  by  Professor  Plehn  as  '  corporation  taxes '  are  here  presented 
under  the  heads  of  'special  property  taxes,'  'business  taxes,' 
and  'other  taxes';  Professor  Plehn's  'inheritance  taxes'  are 
included  in  this  report  under  the  head  of  '  special  property  taxes ' ; 
his  '  income  taxes '  are  here  included  under  the  head  of  '  other 
taxes'  ;  and  his  '  business  taxes'  are  here  given  under  the  various 
subclasses  of  licenses  and  permits.  In  the  text  describing  the 
tables  of  Part  IV.,  the  amounts  of  all  taxes,  such  as  corporation, 
inheritance,  income,  and  the  like,  are  given  separately  under  the 
designations  of  Professor  Plehn. 

"  To  furnish  a  key  to  the  intelligent  study  of  the  census  tables 
of  financial  transactions,  there  is  here  presented  a  concise  state- 
ment of  the  classes  of  revenue  included  under  the  various  heads  of 
the  tables  of  this  report.  To  present  this  in  a  complete  form  it  is 
necessary  to  repeat  a  few  of  Professor  Plehn's  definitions. 

"  A  tax  is  a  general  compulsory  contribution  of  wealth  collected 
in  the  general  interest  of  the  community  from  individuals  or  corpo- 
rations by  an  exercise  of  the  sovereign  power  of  the  government, 
and  levied  without  reference  to  the  special  benefits  which  the  indi- 
vidual contributors  may  derive  from  the  public  purposes  for  which 
the  revenue  is  required. 

"  Property  taxes,  which  constitute  the  most  important  single 
source  of  revenue,  are  direct  taxes  upon  property,  or  upon  persons, 
natural  or  corporate,  in  proportion  to  their  property,  excepting  such 
as  may  be  specifically  exempt,  because  taxea  by  othet  methods,  or 


96  INTRODUCTION   TO  PUBIIC  FINANCE     part  ii 

on  account  of  their  public  character  or  from  considerations  of  public 
policy.  Property  taxes  are  divided  by  the  Bureau  of  the  Census 
into  two  main  classes  —  general  and  special.  General  property 
taxes  are  direct  taxes  levied  upon  property  in  general,  in  proportion 
to  its  assessed  or  appraised  value  ;  under  this  head  are  included  all 
property  taxes  assessed  and  collected  by  methods  practically  iden- 
tical with  those  employed  in  the  taxation  of  the  property  of  the 
average  citizen.  Special  property  taxes  are  direct  taxes  levied  or 
collected,  or  both  levied  and  collected,  by  methods  not  applied  to 
property  in  general;  among  such  taxes  are  those  popularly  referred 
to  as  corporation  taxes,  bank  taxes,  security  taxes,  and  mortgage 


"  Under  business  taxes  the  Bureau  of  the  Census  has  tabulated 
taxes  collected  from  persons,  natural  or  corporate,  by  reason  of 
their  business,  where  such  collection  is  not  associated  with  the 
granting  of  a  license  or  permit  to  engage  therein. 

"  Under  the  head  of  poll  taxes  the  Bureau  of  the  Census  has 
sought  to  secure  as  complete  an  exhibit  as  possible  of  the  receipts 
by  nations,  states,  and  municipalities  from  all  forms  of  per  capita 
taxes,  whether  levied  uniformly  upon  all  males,  or  graded  accord- 
ing to  occupation  or  otherwise  ;  and  whether  levied  as  a  specific 
amount  against  all  persons  subject  thereto,  or  as  a  quasi-property 
tax  based  upon  an  arbitrary  valuation  of  polls. 

"Under  other  taxes  are  included  income  taxes,  taxes  on  commis- 
sions of  public  offices,  litigation  taxes,  frontage  taxes,  tonnage 
taxes,customs  taxes,  and  internal  revenue  taxes.  The  latter  are  a 
combination  of  business  and  license  taxes. 

"  Under  the  designation  receipts  from  licenses  and  permits  the 
Bureau  of  the  Census  has  tabulated  all  revenues  collected  from  per- 
sons, natural  or  corporate,  by  reason  of  the  business  where  such 
collection  is  associated  with  and  enforced  by  the  granting  of  a  li- 
cense or  permit  to  engage  therein,  and  where  the  granting  of  such 
license  or  permit  is  a  condition  to  the  transaction  of  business,  to  the 
following  of  a  trade  or  industrial  calling,  to  the  performance  of  any 
act,  or  to  the  beginning  of  any  undertaking. 

"The  revenues  from  licenses  and  permits  include  —  according  to 
the  analysis  of  most  writers  on  public  finance  —  a  tax,  as  already  de- 
fined, and  a  fee  or  charge  ;  the  fee  is  the  payment  for  the  clerical 
labour  of  issuing  and  recording  the  license  or  permit  and  of  super- 
vising the  exercise  of  the  general  privilege  granted  thereby,  and  the 
tax  is  the  excess  over  the  fee. 


CHAP.  I     THE  CHARACTER    OF  PUBLIC  REVENUES     97 

"  Both  licenses  and  permits  are  issued  quite  generally  to  assist 
nations,  states,  and  municipalities  in  enforcing  compliance  with 
statutes,  regulations,  and  ordinances  for  the  preservation  of  public 
morals  and  for  the  protection  of  life,  health,  and  property,  though, 
as  a  rule,  this  fact  is  more  readily  perceived  in  connection  with  per- 
mits than  with  licenses.  Of  general  privileges  granted  chiefly  for 
enforcing  police  regulations  and  classed  in  the  census  report  as  li- 
censes, mention  should  be  made  of  dog  licenses,  good  for  a  year, 
and  permits  to  minors  under  the  curfew  laws,  also  good  for  a  year. 
The  former  is  in  a  class  by  itself,  while  the  latter  is  included,  to- 
gether with  licenses  associated  with  pleasure  or  recreation,  such  as 
those  for  hunting  and  fishing,  under  the  designation  general  li- 
censes. 

"  Receipts  from  permits  are  sometimes  only  nominal,  the  amount 
collected  being  barely  sufficient  to  cover  the  cost  of  issuing  and  re- 
cording them  and  of  supervising  the  exercise  of  the  general  privi- 
lege granted.  For  this  reason  some  writers  on  public  finance 
classify  them  as  fees. 

"  In  most  states  revenues  collected  in  connection  with  the 
granting  of  licenses  and  permits  are  referred  to  as  '  receipts  from 
licenses  and  permits '  ;  in  a  few,  however,  they  are  designated 
as  '  privilege  taxes '  or  '  occupation  taxes.'  The  receipts  from 
licenses  and  those  from  permits  are  shown  separately  in  the  tables 
of  this  report,  principally  to  enable  students  of  the  subject,  in  their 
analysis  of  the  census  reports,  to  classify  permits  according  to  their 
own  judgment.  With  receipts  from  licenses  are  included  those 
from  general  privileges  granted  for  the  management  or  conduct  of 
a  business  or  occupation,  such  as  that  of  a  hotel  keeper,  a  plumber, 
or  for  the  keeping  of  a  billiard  table  for  gain  ;  such  privileges  are 
usually  granted  for  a  specified  period  of  time,  as  for  a  year,  a 
month,  or  a  day — the  greater  number  being  issued  for  a  year. 
With  receipts  for  permits  are  included  those  from  general  privileges 
granted  for  the  pierformance  of  some  specific  act,  the  nature  of 
which  is  exactly  defined,  and  the  performance  of  which  terminates 
the  grant,  as  the  erection  of  buildings,  the  making  of  a  connection 
with  sewer  and  water  pipes,  the  moving  of  buildings,  the  burial  of 
the  dead,  and  the  like. 

"  Penalties,  fines,  and  forfeits,  which  are  among  the  minor 
sources  of  the  general  revenue  of  governments,  are  all  collected  as 
punishment  for  failure  to  obey  civil  and  criminal  laws  and  local 
ordinances,  and  hence  might  be  termed  '  penalties,'  in  the  broad- 

H 


98  INTRODUCTION   TO  PUBLIC  FINANCE      part  ii 

est  meaning  of  the  word.  Under  this  head  are  included  penalties 
collected  by  reason  of  the  failure  of  taxpayers  to  meet  their  taxes 
within  the  time  required  by  law ;  all  fines  collected  by  criminal 
courts ;  and  forfeits  in  criminal  and  civil  transactions,  such  as  for- 
feits in  criminal  bonds,  forfeits  in  contractor's  bonds,  etc. 

"  Under  the  head  or  receipts  from  subventions  and  grants^  the 
Bureau  of  the  Census  tabulates  as  receipts  from  subventions  all 
amounts  which  are  received  by  states  and  municipalities  from  the 
nation  or  other  civil  division  superior  to  themselves  with  the  distinct 
understanding  that  the  money  so  received  shall  be  employed  for 
supporting  some  particular  governmental  service,  as  that  of  schools, 
libraries,  or  armories  ;  and  as  receipts  from  grants^  those  amounts 
received  from  such  civil  divisions  without  any  condition  attached  to 
the  gift. 

'■'■  Beceipts  from  donations  and  gifts  are  those  amounts  gi-atui- 
tously  paid  by  individuals  or  corporations  to  national,  state,  and 
local  governments  for  general  and  specified  governmental  purposes. 
In  law  the  word  'donation,'  rather  than  'gift,'  is  most  fre- 
quently employed  in  referring  to  voluntary  contributions  for  speci- 
fied purposes,  made  through  the  instrumentality  of  a  formal  deed 
or  contract.  So  far,  then,  as  donations  and  gifts  have  different 
meanings,  the  former  may  be  said  to  approximate  that  of  gov- 
ernment subventions,  and  the  latter  that  of  governmental  grants. 

'•'■Receipts  from  commercial  revenues. — The  commercial  reve- 
nues of  a  nation,  state,  or  municipality  comprise  the  income  from 
industries,  investments,  and  special  services.  The  receipts  from  in- 
dustrial income  are  classified  with  respect  to  the  industry  from 
which  they  are  derived  —  as  waterworks,  electric  light  works,  etc. 
The  receipts  from  investment  i?icome  include  the  rent,  interest,  and 
dividends  received  from  real  estate  or  securities  held  by  the  gov- 
ernmen4d»  investments.  The  receipts  from  special-service  income,, 
other  than  those  derived  from  spef^ial  assessments,  are  subdivided 
according  to  the  office  by  which  the  service  is  furnished.  Special 
assessments  are  compulsory  contributions  levied,  under  the  taxing 
or  police  power,  to  defray  the  cost  of  a  special  public  improvement 
or  public  service  undertaken  in  the  public  interest.  They  differ 
from  taxes  in  being  apportioned  according  to  the  assumed  benefit 
to  the  individual  for  whom  the  service  is  performed,  or  accordirig 
to  the  assumed  increase  in  value  of  the  property  affected  by  the 
improvement. 

"The  above  is  a  classification,  mainly  from  the  administrative 


CHAi'.  I      THE  CHARACTER    OF  PUBLIC  REVENUES     99 

standpoint,  of  the  receipts  from  the  commercial  revenues.  These 
receipts  may  be  classified  also  with  reference  to  their  typical  form 
or  character.  So  classilied,  they  are  frequently  referred  to  in  popu- 
lar language,  in  the  technical  works  of  accountants,  and  in  legal 
enactments  and  governmental  accounts  as  prices,  fees,  charges, 
special  assessments,  etc. ;  these  classes  of  receipts  all  represent  com- 
pensation for  commodities  or  services  sold  or  special  benefits  con- 
ferred by  the  government. 

"  Price  is  the  general  designation  which  writers  on  public  finance 
give  to  compensation  for  service  or  commodities  sold  by  the 
government. 

"The  compensation  for  a  service  or  commodity  sold  by  a  gov- 
ernment in  the  same  way  that  a  private  individual  would  sell,  is 
referred  to  by  writers  on  public  finance  as  a  quasi-private  price ; 
while  the  compensation  for  a  service  or  a  commodity  furnished  by 
a  government  primarily  for  the  special  benefit  of  the  individual,  but 
secondarily  in  the  interest  of  the  community,  is  designated  by  them 
public  price. 

"Public  prices  are  of  three  distinct  classes:  They  may  be  (1) 
what  is  designated  in  the  commercial  world  as  monopoly  prices, 
representing  more  than  the  cost  of  the  service  or  commodity  fur- 
nished ;  (2)  prices  established  to  cover  the  cost  of  the  service  or 
commodity  ;  or  (3)  prices  providing  the  service  or  commodity  at 
less  than  cost.  In  the  first  case  the  price  includes  a  tax,  and  in 
the  second  or  third  it  approximates  a,  fee;  in  the  first,  the  service 
or  commodity  furnished  assists  in  collecting  a  tax  as  a  contribution 
to  the  general  revenue,  and  in  the  third,  it  is  in  part  paid  from 
such  revenue.  In  all  cases  of  public  price,  the  free  contractual 
relations  of  public  life  are  modified  by  the  monopoly  exercised  by 
the  government. 

"Although  the  distinction  given  above  between  quasi^g^ate  and 
public  prices,  as  well  as  that  mentioned  in  referring  to  the  three 
classes  of  public  prices,  is  valuable  from  the  standpoint  of  the  stu- 
dent of  public  finance,  it  cannot  at  the  present  time  be  made  of 
any  practical  value  in  the  domain  of  governmental  statistics. 

"  Of  the  sources  of  commercial  revenue  that  involve  the  element 
of  price,  mention  is  made  of  sales,  interest,  rents,  special  privileges 
of  various  kinds,  sales  of  siich  privileges,  privilege  rentals,  labour, 
manufactures,  rates,  and  tolls.  Of  the  foregoing,  sales,  interest, 
and  rents  generally  come  within  the  definition  of  quasi-private. 
price,  the  others  within  that  oi  public  price.    The  prices  connected 


100         INTRODUCTION   TO  PUBLIC  FINANCE      part  ii 

with  investments  are  therefore  quasi-private  ;  those  connected  with 
industries  are  more  largely  public  ;  and  those  connected  with  special 
service  are  quite  variable,  depending  much  upon  the  nature  of  the 
special  service  rendered  by  the  individual  nation,  state,  or  munici- 
pality. 

"In  tabulating  the  receipts  from  sources  involving  the  element 
of  price  the  Bureau  has  observed  the  following  distinctions : 

"Under  sales  are  included  sales  of  real  estate  of  the  nation, 
state,  or  municipality  ;  sales  of  securities  belonging  to  their  sinking, 
investment,  and  public  trust  funds  ;  and  minor  sales  by  the  various 
departments  and  industries  of  their  discarded  equipment,  and  of 
material  discarded  in  connection  with  the  different  activities  of  the 
government. 

"  Under  interest  and  rents  are  included  all  receipts  of  nations, 
states,  and  municipalities  corresponding  to  those  commonly  so  des- 
ignated in  private  finance.  Receipts  from  so-called  interest  levied 
on  account  of  non-payment  of  taxes  and  special  assessments  at  the 
time  required  by  law  are,  however,  tabulated  as  interest  when  col- 
lected at  the  legal  rate  of  interest  in  the  several  divisions  collecting 
the  same,  and  are  tabulated  as  '  tax  penalties '  when  collected  at 
a  higher  rate. 

"  Beceipts  from  special-service  privileges  include  all  periodical 
receipts,  other  than  general  or  special  property  taxes  which  are 
collected  from  individuals  or  corporations  enjoying  the  special  priv- 
ilege of  using  the  highways  or  for  providing  some  public  service, 
such  as  that  furnished  by  street  railroad,  subway,  electric  light, 
telephone,  and  water  companies. 

'"All  receipts  from  individuals  and  corporations  in  payment  for 
special-service  privileges  sold  outright  are  designated  as  receipts 
from  special-service  privilege  sales. 

"  The  receipts  derived  from  special-service  privileges  and  special- 
service  privilege  sales,  which  are  commonly  spoken  of  as  taxes, 
differ  from  taxes  in  being  payments  for  services  and  also,  in  the 
majority  of  cases,  in  being  voluntary  or  contractual  instead  of 
compulsory.  However,  when  a  payment  made  by  a  public-ser- 
vice corporation  to  a  nation,  state,  or  municipality  is  in  lieu  of  all 
taxes,  or  is  levied  upon  franchises  classed  as  property,  and  at  the 
same  rate  as  other  taxes,  such  payment  is  included  among  general 
or  special  property  taxes. 

"  Under  privilege  rentals  are  included  all  periodical  receipts  from 
licenses  other  than  those  defined  above  as  receipts  from  special- 


CHAP.  I   THE  CHARACTER   OF  rUBtJC.  REVmtjES    %{i\ 

service  privileges,  which,  in  addition  to  confemng  the  privileges 
usually  bestowed  by  such  instruments,  grant  the  use  or  enjoyment 
of,  or  right  upon,  some  property  of  the  government  granting  the 
same,  as  the  streets,  parks,  or  public  buildings. 

''Beceiptsfrom  minor  privileges  include  all  periodical  receipts 
collected,  without  the  granting  of  a  license,  from  those  enjoying 
special  privileges  in  or  upon  the  public  highways,  other  than 
receipts  derived  from  public-service  privileges  and  public-service 
privilege  sales. 

"  All  receipts  from  minor  privileges  sold  outright  are  designated 
as  minor-privilege  sales.  It  is  to  be  noted  that  practically  the  only 
respect  in  which  minor  privileges  and  minor-privilege  sales  differ 
from  privilege  rentals  is  that  privilege  rentals  always  involve  the 
issuance  of  a  license,  which  in  the  other  cases  is  not  issued. 

"  Special-service  privileges,  privilege  rentals,  and  so-called  minor 
privileges  differ  from  general  privileges,  as  granted  by  licenses 
and  permits,  in  that  while  the  bestowal  of  the  four  classes  of  privi- 
leges always  involves  the  right  to  conduct  a  business  or  perform 
some  act,  the  bestowal  of  a  special-service  privilege  or  a  privilege 
rental  or  minor  privilege  gives  —  what  the  general  privilege  does 
not  —  the  right  to  use  some  property  of  the  nation,  state,  or  munici- 
pality making  the  grant. 

"  All  receipts  included  under  Zaftowr,  manufactures,  rates,  and  tolls 
are  derived  from  services  or  commodities  furnished  by  the  industries 
of  nations,  states,  and  municipalities.  Receipts  from  labour  include 
the  receipts  for  work  performed  by  convicts  in  penal  institutions 
and  by  inmates  of  charitable  institutions.  Receipts  from  manufac- 
tures include  the  receipts  from  the  sale  of  articles  manufactured  in 
penal  and  charitable  institutions.  Receipts  from  rates  include  all 
payments  for  water,  electric  light,  gas,  and  other  utilities  furnished 
by  governmental  industries.  The  word  '  toll '  has  been  used  ex- 
clusively to  designate  the  specific  charges  made  for  bridge  and 
ferry  passage  across  streams  and  harbours. 

"  Fees  and  charges,  as  distinguished  from  taxes,  are  compulsory 
contributions  of  wealth  which  are  exacted  from  persons,  natural 
or  corporate,  to  defray  a  part  or  all  of  the  expense  involved  in 
some  service  rendered  by  the  government. 

"The  greater  portion  of  the  amounts  classified  by  the  Bureau 
of  the  Census  as  fees  is  for  services  which  can  be  performed  only 
by  the  governments.  They  are  mainly  clerical  in  character,  and 
their  cost  is  so  well  established  that  the  payments  therefor,  which 


1<0|^  J  \jS^ft(0t>lTCTl6iV\  TO   PUBLIC  FINANCE      part  il 

are  made  in  advance  and  are  often  only  nominal,  are  fixed  by 
statute  or  ordinance  establisliing  a  scale  of  fees. 

"  In  contrast  with  the  foregoing,  the  amounts  classified  as 
charges  generally  represent  payments  for  services  which  are  similar 
in  character  to  those  rendered  by  one  individual  to  another  in 
private  life,  and  as  a  rule  are  other  than  clerical  in  their  nature. 
With  few  exceptions  the  amounts  to  be  charged  for  such  services 
are  definitely  established  only  upon  completion  of  the  work  or 
service.  Among  the  special  privileges  of  governments  paid  for  by 
charges  are  the  making  of  connections  with  sewer  and  water  pipes 
and  the  removal  of  snow  from  sidewalks. 

"In  passing  it  should  be  mentioned  that  a  great  proportion  of 
the  receipts  from  fees  and  charges,  as  tabulated  by  the  census, 
approximate  in  character  if  they  are  not  identical  with,  those  to 
which  is  given  above  the  designation  of  price.  However  clear  in 
theory  may  be  the  distinction  between  these  classes  of  revenue, 
in  practice  they  so  merge  one  into  the  other  that  the  drawing  of  a 
hard  and  fast  line  between  them  was  found  to  be  as  impossible  as 
it  was  in  the  case  of  public  and  quasi-private  price.  The  diversity 
in  public  policies  of  different  governments  produces  a  correspond- 
ing diversity  in  the  methods  of  performing  any  given  service  and 
of  exacting  compensation  therefor,  as  has  been  pointed  out  by 
Professor  E.  R.  A.  Seligman  and  many  other  writers.  As  a  result 
that  which  is  a  '  price '  in  one  city  is  a  '  fee '  in  another,  and 
vice  versa." 


CHAPTER   II 

THE  VARIOUS   KINDS  OF  TAXES,   FEES,  AND  RATES  ; 
ALSO   DEFINITIONS 

Section  1.    Considerable   confusion  in   the    dis- 
cussions of  the  different  modes  of  taxation  is  due  to 
the  failure  to  distinguish  clearly  between  the  justi- 
fication of  taxation  in  general  {i.e.  why   The  measure 
there  should  be  any  taxes  at  all)  and  the  of  taxation 

distinguished 

measure  of  taxation  {i.e.  what  should  from  the  justi- 
be  the  basis  upon  which  to  decide  how  fi'^^^^^"-- 
much  each  citizen  should  pay).  The  universally 
accepted  justification  of  taxation  is  the  common 
benefit  conferred  upon  the  individuals  by  the  action 
of  the  government.  But  the  common  benefit  is, 
strictly  speaking,  equal,^  while  the  taxed  citizens 
are  unequal   in   wealth    and    ability   to   pay   taxes. 

1  "  The  protection  of  the  subject  in  the  free  enjoyment  of  his  life, 
his  liberty,  and  his  property,  except  as  they  might  be  declared  by 
the  judgement  of  his  peers  or  the  law  of  the  land  to  be  forfeited, 
was  guaranteed  by  the  twenty-ninth  chapter  of  Magna  Charta, 
'  which  alone,'  says  Sir  William  Blackstone,  '  would  have  merrited 
the  title  that  it  bears  of  the  Great  Charter.'  "  Cooley,  Constitu- 
tional Limitations,  5th  edition,  p.  430.  "  Equality  of  rights,  privi- 
leges, and  capacities  unquestionably  should  be  the  aim  of  the  law ; 
..."  "  The  State,  it  is  to  be  presumed,  has  no  favours  to  bestow, 
and  designs  to  inflict  no  arbitrary  deprivation  of  rights."  Ibid.. 
pp.  486  and  487. 

103 


104         INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 

Therefore  recourse  has  to  be  had  to  some  othei 
measure  of  taxation.  It  lay  nearest,  in  the  search 
for  such  a  measure,  to  overlook  the  distinction 
between  the  measure  and  the  justification  and  to 
assume-  that  there  was  a  difference  in  the  benefit 
enjoyed  by  the  different  citizens.  Thus  one  theory 
assumes  that  protection  to  life,  liberty,  and  property 
The  benefit  is  the  cliicf  benefit  conferred,  and  that 
theory.  ^-his   benefit,    or   at   all    events   its  cost, 

varies  as  the  property  varies,  generally  in  exactly 
the  same  projDortion.  This  theory  has  been  called 
the  benefit  theory  of  taxation,  because  it  attempts  to 
estimate  by  the  benefit  conferred  the  amount  of  tax 
each  individual  should  pay. 

The  difiiculties  involved  in  measuring  benefit, 
with  sufficient  accuracy  to  serve  as  a  basis  for  taxa- 
tion, led  another  school  of  thinkers  to  abandon  that 
entirely.  These  writers  feel  that  each  citizen  was 
necessarily  a  part  of  the  organism  of  the  State,  one 
of  the  nourishing  cells,  as  it  were.  And,  as  in  all 
organisms  of  nature  each  organ  or  each  cell  con- 
tributes to  the  life  of  the  whole,  in  accordance  with 
its  powers  or  strength,  so  each  citizen  should  con- 
tribute as  he  is  able.  They  claim  that  it  is  easier  to 
measure  ability  than  it  is  to  measure  benefit.  This 
The  faculty  theory  is  called  the  faculty  theory,  the 
theory.  term  "  faculty  "  having   been    found   in 

this  sense  in  early  tax  laws.  Generally  speaking, 
this  ability  is  supposed  to  be  indicated  in  some  way 
by  wealth  or  by   income.      But   the   advocates   of 


CHAP.  11  TAXES,  FEES,  AND  RATES  105 

faculty  as  a  measure  of  taxation  encounter  a  serious 
difficulty  in  attempting  to  ascertain  whether  faculty 
is  proportional  to  wealth  or  income  or  increases  more 
rapidly  as  these  increase  in  amount.  A  negative 
side  of  the  same  idea  is  presented  when  it  is  claimed 
that  the  tax  should  impose  an  equal  sacrifice  upon 
every  citizen.  In  determining  what  constitutes  equal 
sacrifice,  we  encounter  the  same  difficulty  as  in 
determining  how  to  measure  ability. ^ 

Sec.  2.  It  will  be  noticed  that  the  basis  from 
which  each  of  these  measures  starts  is  individual 
wealth.  The  first  argues  that  benefit  is  indicated  by 
wealth,  the  second  that  faculty  is  so  mpcvitieB  in 
indicated.  If  wealth  is  the  basis,  then  the  way  of 
the  classification  of  taxes  might  be  made  ^^^  ^^la^sifi^ 
to  depend  on  that  of  wealth.  Such  a  Hon  of  taxes. 
method,  although  tried,  has  been  found  impracti- 
cable, because  the  processes  of  shifting  render  it 
impossible  to  ascertain  the  final  incidence  with 
sufficient  accuracy  for  classification.  It  has  also 
been  suggested  that  we  might  use  the  different 
,  specific  means  employed  by  nations  to  measure 
benefit  or  faculty.  Bat  here  again  we  meet  with 
difficulties  that  are  almost  insuperable;  for  in  that 
case  the  classification  will  depend  on  the  theory 
adopted  as  to  the  correct  measures.  If  we  adopt 
1  See  Chap.  III.  for  further  discussion  of  this  point.  A  full  and 
instructive  discussion  of  these  theories  is  to  be  found  in  Seligman'a 
Progressive  Taxation  in  Theory  and  Practice.  See  also,  Professor 
Edgeworth's  three  articles  on  the  "  Pure  Theory  of  Taxation," 
Economic  Journal,  Vol.  VIL 


108         INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 

the  benefit  theory,  our  classification  will  depend  on  the 
different  indices  of  benefit  chosen.  If  we  adopt  the 
faculty  theory,  then  our  classification  will  be  accord- 
ing to  the  indices  of  faculty.  But  we  are  not  at 
liberty  to  adopt  one  or  the  other  of  these  theories 
exclusively,  because  no  nations  have  done  so  in  prac- 
tice, and  their  taxes  are  some  of  them  based  on 
the  one  theory,  or  at  least  best  explained  thereby, 
and  some  on  the  other,  while  many  combine  both  or 
may  be  interpreted  in  either  way.  At  the  same  time 
many  taxes  that  could  not  be  justified  on  either 
basis  are  retained  by  the  nations  on  grounds  of  general 
expedienc}^  because  they  yield  considerable  revenue, 
or  because  they  have  been  long  in  use.  If,  there- 
fore, we  adopt  a  classification  presupposing  either 
theory,  we  shall  find  many  taxes  that  do  not  con- 
form to  it.  Inasmuch  as  no  consistent  plan  for 
the  measurement  of  taxation  has  been  adopted  by 
any  country,  no  uniform  method  of  classification 
upon  "  natural "  grounds  can  be  found. 

These  difiiculties  are  inherent  in  the  matter  that 
we  are  attempting  to  classify.  The  librarian  gen- 
^r      T./r.    ,    erally  desires   to   arranofe   his  books  ac- 

These  dxffic'uL-  \  ° 

ties  are  insu-  cordiug  to  the  subjccts  treated.  But 
pera  e.  encyclopsedias  could  not  be  so  arranged 

without  tearing  the  books  to  pieces.  We  might 
theoretically  dissect  each  tax,  and  assign  its  parts 
to  the  different  categories  according  to  the  real 
nature  of  each  part.  But  we  .gain  little  by  this 
painful  process.     In  this  case  classification  will  not 


CHAP.  II  TAXES,   FEES,   AND  RATES  107 

help  US  to  ascertain  the  real  nature  of  the  things 
studied. 

These  difficulties  have  not  always  been  regarded 
as  insuperable,  and  many  brave  attempts  have  been 
made  to  overcome  them,  but  with  so  Previous 
little  uniformity  as  to  mark  the  failure,  attempts  at 
There  are  almost  as  many  classifications  ^^^'^fi'^'^^- 
as  writers.  1  The  least  satisfactory  of  all  are  those 
that  attempt  to  find  some  natural  arrangement. 
Those  which  have  the  most  apparent  success  accept 
the  official  names  used  by  the  treasury  departments 
of  the  different  nations,  and  give  them  merely  such 
limitation  as  is  necessary  to  use  them  scientifically. 

Sec.  3.  Perhaps  the  most  common  distinction  is 
that  made  between  direct  and  indirect  taxes.  This 
distinction  first  obtained  theoretical  im-  m.  ^-  ■ 

J  he  dtstinc- 

portance  in  the  writings  of  the  Physio-  tion  between 
crats.     By  direct  taxes  they  meant  any  f^^'^^^^^^^^ 

•^  ^  ^     direct  taxes  is 

ctf  those  taxes  which  were  levied  imme-  old,  and  im- 
diately  upon  the  «  produit  net. "  2  There  ^^^^""'• 
alone,  they  argued,  could  be  the  fund  out  of  which 
taxes  could  be  paid.  To  levy  taxes  anywhere  else 
was  indirect,  because  the  burden  would  be  shifted 
from  one  to  another  until  it  rested  there.  The 
assignment  of  any  particular  tax  to  one  or  the  other 
of  these  categories  was  with  them  a  mark  of  approval 
or  condemnation.  With  the  recognition  that  other 
economic  processes  besides  those  which  added  to  the 

iSee  Nicholson,  Principles  of  Political  Economy,   Vol.    TIL, 
p.  291  ff.  2  cf.  Higgs,  The  Physiocrats. 


108         INTRODUCTION   TO   PUBLIC  FINANCE     part  ii 

material  property  of  the  world  created  wealth,  this 
peculiar  theory  of  taxation  drifted  into  abeyance. 
The  same  terms,  however,  have  been  widely  used 
by  officials  and  writers  and  have  such  prevalence 
that  a  recognition  of  them  cannot  be  avoided. 

Rau  and  Wagner  have  made  the  most  elaborate 
attempts  to  define  the  modern  usage. ^  In  this  they 
Wagner's  defi-  were  Only  partly  successful,  because  of 
direct  and  in-  uTegularities  lu  official  usage.  Butde- 
direct  taxes.  spite  thesc  irregularities  the  terms  are 
valuable.  Wagner's  distinction  is  practically  as 
follows.  There  are  two  ways  in  which  direct  and 
indirect  taxes  differ.  (1)  In  the  case  of  direct 
taxes,  the  taxpayer  is  also  the  tax-bearer,  at  least  in 
the  expectation  of  the  law-giver;  any  shifting  of 
the  burden  to  another  is  not  expected,  not  desired, 
and  sometimes,  even,  forbidden,  or  subject  to  penalty. 
Indirect  taxes  are,  vice  versa,  those  in  which  the  tax- 
payer is  not  permanently  the  tax-bearer,  or  is  not  in- 
tended to  be  ;  but  a  shifting  of  the  burden  to  another 
is  expected  and  desired,  and  may  even  be  prescribed. ^ 

But  the  element  of  shifting  is  not  the  only  one 
that  is  essential  to  the  idea.  The  second  character- 
Administra-  istic  is  what  may  be  called  the  techni- 
tiveconcep-      ^^i^  administrative  conception  of  direct 

tion  of  direct 

and  indirect  and  indirect  taxes.  It  is  based  on  the 
taxes.  method  of  procedure.     (2)   Direct  taxes 

iCf.  Bullock,  "Direct  and  Indirect  Taxes,"  Political  Science 
Quarterly,  Vol.  XIII. 

2  Wagner,  Finanzwissenschaft,  II.,  1st  ed.,  p.  269  ;  2d  ed.,  sees. 
97-100.    Schonberg's  Handbuch,  3d  ed.,  III.,  p.  171. 


CHAP.  11  TAXES,  FEES,   AND  RATES  109 

are  such  as  are  laid  regularly  according  to  some  fixed 
fact  (or  one  so  treated,  and  at  least  somewhat  fixed), 
something  regularly  recurrent,  and  hence  previously 
ascertainable,  —  a  fact  as  of  personality,  of  rank,  of 
property,  of  earning,  etc.,  — and  are,  consequently, 
assessed  according  to  some  list  or  roll  (cadastre). 
Indirect  taxes,  on  the  other  hand,  are  such  as  are 
laid  according  to  some  changing,  temporary,  more 
or  less  accidental  fact  which  is,  consequently,  not 
previously  ascertainable, —  something  the  result  of 
processes,  events,  transactions,  —  and  are  laid  and 
collected  according  to  tariffs.^ 

These  two  methods  of  distinction  follow  quite 
closely  the  usages  of  theoretical  writers  and  of  offi- 
cial bureaux.  There  are  important  exceptions  in 
some  countries.  Thus  in  France  the  customs  duties 
are  not  officially  classed  as  indirect  Exceptions  in 
taxes,  but  form  a  class  by  themselves  official  usage. 
akin  to  direct  taxes.  In  the  United  States  at  the 
time  of  the  Civil  War  the  income  tax  was  viewed  by 
the  courts  as  an  indirect  tax,  or  at  least  not  as  a 
direct  tax  in  the  sense  of  the  Constitution.^  This 
decision,  however,  was  reversed  in  1895,  by  a  bare 
majority  of  the  same  court,  which  decided  that  a 
somewhat  similar  income  tax  was  a  direct  tax  in  the 

1  Wagner,  Finanzwissenschaft,  II.,  2d  ed.,  p.  239. 

2 Springer  v.  United  States,  102  U.  S.  508.  See  article,  "The 
Direct  Tax  of  1861,"  Quarterly  Journal  of  Economics,  July,  1889  ; 
Seligman,  "The  Income  Tax,"  Forum,  1895;  Bullock,  "The  Origin 
and  Effect  of  the  Direct  Tax  Clause,"  Political  iScience  Quarterly, 
XV.,  p.  470  n. 


110         INTRODUCTION   TO   PUBLIC  FINANCE      part  ii 

meiiiiiiig  of  the  Constitution.  This  decision  was  in 
accord  with  the  distinction  made  above. 

The  principal  direct  taxes  are  :  the  land  taxes, 
building  taxes,  property  taxes,  poll  taxes,  class  taxes, 
^       ^  ,  income  taxes,  industry  taxes  ;  the  indirect 

Taxes  belong-  "^ 

ing  to  each  taxcs  are  :  the  custom  duties  (with  the  exr 
^^^'^'  ception  of   the   French),  internal  excise 

taxes,  transaction  taxes,  most  fees  and  licenses. 
The  inheritance  taxes,  or  death  duties,  as  they  are 
called  in  England,  are  not  easy  to  classify.  In  the 
first  sense  they  are  direct  taxes,  and  in  the  second 
they  are  indirect.  This  is,  perhaps",  the  only  impor- 
^.    .  ,    .        tant  tax  that  cannot   be  easily  classified. 

The  mheri-  -^ 

tance  tax  hard  The  inheritance  tax  wherever  it  exists  is 
to  classify.  ^^^^  bccausc  it  is  expedient  and  witliout 
much  cost  yields  a  large  return.  It  is  levied  at  a  time 
when  the  persons  paying  it  are  not  in  position  to  de- 
mand a  strong  justification.  It  is  sometimes  justified 
on  the  ground  that  it  compensates  for  previously  un- 
paid taxes.  If  this  justification  holds,  then  the  in- 
heritance tax  must  be  classed  as  a  direct  tax. 

Sec.  4.  A  few  other  terms  which  are  often  used 
as  the  names  of  different  groups  of  taxes  and  help^ 
Taxes  on  per-  in  a  Way,  to  classify  them  must  be  men- 
THy^orl^-  tioned  in  this  connection.  We  some- 
come,  times  speak  of  taxes  as  being  separable 
into  (1)  those  on  persons,  (2)  those  on  property, 
(3)  those  on  income.  These  terms  do  not  indicate 
the  final  source  from  which  the  tax  is  paid,  but  the 
basis  upon  which  it  is  levied. 


CHAP.  II  TAXES,   FEES,   AND  RATES  \\\ 

1.  In  the  case  of  personal  taxes  the  different  per- 
sons who  are  to  pay  the  tax  are  listed  and  assessed 
either  (1)  individually,  as  in  the  case  of  per  capita 
taxes,  or  (2)  as  representatives  of  a  group,  as  in 
the  family  or  hearth  taxes,  or  (3)  according  to 
some  characteristic,  as  rank  in  life,  office.  Personal 
employment,  age,  income,  property,  etc.,  '°^««- 
supposed  to  be  indicative  of  the  benefit  they  receive 
from  the  government  or  their  ability  to  pay.  A  com- 
plete system  of  such  taxes  might  be  built  up,  and  it 
is  possible  to  suppose  that  all  the  requirements  of 
justice  could  be  met  thereby. 

2.  Taxes  on  property  are  those  taxes  which  take 
the  property  owned  by  a  person  as  the  index  either 
of  the  benefit  received  or  of  the  ability  to  pay. 
These  taxes  may  be  considered  as  pursuing  prop- 
erty wherever  it  is  to  be  found  with  little  or  no 
regard  for  the  personality  of  the  owner.  Property 
They*  are  not,  of  course,  in  any  but  the  ^«^^*' 
most  exceptional  instances,  paid  out  of  property. 
But  no  particular  regard  is  had  to  the  real  source 
of  payment.  They  may  be  levied  upon  any  and 
every  kind  of  property.  They  are  sometimes  called 
real  taxes  Irom  res,  things.  But  this  usage  has  no 
established  sanction  in  English ;  in  that  language 
real  taxes  are  taxes  upon  real  estate. 

3.  Taxes  on  income  in  the  broadest 'sense  are  all 
those  taxes  which   make   wealth   in  the 

Income  taxes. 

process  of  acquisition  the  basis  oi  assess- 
ment.    These  are  of  two  principal  kinds  :  (1)  those 


112         INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 


%. 


which  are  levied  upon  the  annual  increment  of  wealth 
as  such,  irrespective  of  the  person  who  is  the  recipi- 
ent thereof.  That  is,  they  treat  the  various  items 
of  wealth  increment  as  the  basis  of  taxation  without 
regard  to  the  grouping  of  these  increments  into  a 
whole  in  the  income  of  any  particular  person,  and 
consider  the  person  paying  tlie  tax  only  in  so  far  as 
he  is  an  income  producer  through  his  own  activities. 
This  is  the  character  of  the  British  income  tax. 
(2)  Those  which  demand  of  each  person,  or  seek  to 
obtain  concerning  each  person,  a  summary  of  the  total 
income  he  receives.  This  latter  tax  is  sometimes  so 
treated  as  to  make  it  difficult  to  distinguish  it  from 
a  personal  tax,  for  the  different  persons  are  listed 
and  classed  according  to  amount  of  income  they 
receive. 

By  a  peculiar  and  entirely  unwarranted  use  of 
common  English  terms  in  a  strange  and  foreign 
Subjective  scusc,  property,  income,  and  the  like 
and  objective     ^ayg  b^cn   Called  the    tax   objects,  and 

taxes.     An  ... 

unallowable  ^hc  Corresponding  taxes  objective  taxes, 
distinction.  meaning  that  they  are  taxes  on  things 
in  distinction  from  taxes  on  persons.  On  the 
other  hand,  the  persons  are  called  the  tax  subjects, 
and  personal  taxes  called  subjective.  This  usage, 
although  it  has  the  sanction  of  a  great  author- 
ity, in  Bastable,  has  fortunately  not  been  favour- 
ably received.  Seligman,  in  a  review  of  Bastable's 
book,  pointed  out  that  by  the  object  of  a  tax 
we    usually   mean    the    purpose    of    the    tax,  and 


CHAP.  II  TAXES,   FEES,  AND  RATES  \\^ 

the  tax  subjects  may  be  things  as  well  as  persons 
subjected  to  the  tax.i 

Sec.  5.     Following  the  lead  of  Adam  Smith,  va- 
rious attempts  have  been  made  to  classify 
taxes  according  as  they  fall  upon  one  or  ^^2!'!"" 
the  other  of  the  different  shares  in  dis-  wording  as 
tribution,-rent,   interest,   profits,    and  t^,!';^: 
wages.     But,  as  Bastable  has  well  shown,  profits,  or 
the   sources   from    which    the    different  ^"^'"'•^«^*- 
taxes    are    paid    are    generally    a    combination    of 
several   of    these.     The    wealth   or  income  of  very 
few  persons  consists  of  simply  one  of  these  shares. 
The  attempts  to  carry  out  such  classifications  consist- 
ently  have  fkiled.      Bastable's   attempted   compro- 
mise by  calling  such  taxes  as  can  be  traced  directly 
to  one  or  the  other  shares  in  distribution  primary, 
and  all  others  secondary,  brings  us  to  practically  the 
same  results  that  were   gained   by   Wagner   in  the 
discussion  of  direct  and  indirect  taxes.     His  primary 
taxes  are  those  called  direct  taxes  above,  his  second- 
ary are  the  indirect. 

One  other  important  set  of  distinctions  must 
receive  our  attention,  because  it  has  the  sanction  of 
two  prominent  authorities.  Wagner  suggested  and 
Cohn  accepted  the  classification  into  taxes  ^"^^*  ^^  "*'■ 

guisitton, 

paid  out    of    wealth  at   the   time  of  its  taxes  on  pos- 
aquisition   (Urwerb),  or  while  in  posses-  session,and 

^  -^  on  conaump- 

sion    (^Besitz),    or    upon    its    con  sump-  tion. 
tion    (^VerhraucTi) .      This   distinction,   according  to 
1  Political  Science  Quarterly^  VII.,  p.  717. 


114         INTRODUCTION  TO  PUBLIC  FINANCE      part  ii 

the  stage  in  which  the  tax  finds  the  wealth  from 
which  it  is  paid,  is  often  useful  in  showing  the  effects 
of  certain  taxes. 

Another  very  valuable  distinction  is  that  made  by 
Taxes  on  the  term  "  taxes  on  revenue."     Taxes  on 

revenue.  revenue  are  those  that  fall  or  are  assessed 

on  the  revenue  or  income  yielded  by  different  kinds 
of  property.  These  are  a  species  of  taxes  on  acquisi- 
tion. 

The  three  sets  of  terms  which  we  have  used  in  this 
work  are:  (1)  direct  and  indirect  taxes;  (2)  personal, 
property,  and  income  taxes;  (3)  taxes  paid  on  wealth 
at  acquisition,  in  possession,  and  at  the  time  of  con- 
sumption. 

Sec.  6.  We  now  come  to  the  important  task  of 
classifying  fees.  The  essential  consideration  to  be 
Classification  held  in  mind  about  these  payments  is 
offeesfoUows    i\^^^  ^licy  covcr  a  part  of  the  total  cost  of 

thai  of  govern-  .    ^  .-     - ^'  i  •    u 

ment  activi-  Certain  governmental  activities,  which 
^^^«-  are  performed  for  the  benefit  of  all,  but 

yet  confer  a  real  or  assumed  special  benefit  on  the 
individual.  When  the  payment  covers  the  whole  or 
a  little  more  than  the  whole  cost,  it  is  a  rate.  Since 
fees  are  levied  upon  the  receivers  of  certain  benefits 
from  the  government,  it  follows  that  the  only  classi- 
fication for  fees  is  that  which  shows  what  activities 
of  the  government  convey  the  benefit.  We  can  thus 
classify  according  to  the  different  departments  of 
the  government,  for  the  services  of  which  fees  are 
collected. 


CHAP.  II  TAXES,   FEES,   AND  RATES  115 

1.  The  most  numerous  are  the  judicial  and  legal 
fees,  the  character  of  which  has  already  judicial  and 
been  made  clear  from  the  discussion  of  i^gaifees. 
the  nature  of  these  expenditures. i  Examples  of 
these  are  the  regular  court  costs  and  fees,  probate 
fees,  the  charges  for  recording  deeds,  mortgages, 
contracts,  marriages,  etc. 

2.  Next  come  the  administrative  fees  for  the 
special  services  of  that  department.  They  are : 
police  fees,  charged  for  the  special  bene-  Administra- 
fits  accruing  or  supposed  to  accrue  to  the  tivefees. 
individuals  from  the  exercise  of  the  police  power  of 
the  State ;  the  fees  for  education,  when  charged  ;  a 
large  number  of  industrial  and  commercial  fees  for 
services  rendered  individuals  in  their  industrial  and 
commercial  undertakings.  The  industrial  fees  in- 
clude license  charges  for  permission  to  carry  on  certain 
businesses  (care  must  be  taken  not  to  confuse  these 
with  police  fees,  nor  with  business  taxes  assessed  on 
the  same  plan).  Commercial  fees  include  road  and 
canal  tolls,  harbour  dues,  and  a  number  of  similar 
charges. 

A  very  important  class  of  administrative  fees  are 
those  known  as  special  assessments,  or  in  England  as 
"  betterment  "  taxes,  usually  levied  for  local  improve 
ments  affecting  property,  as  streets,  sew-  Special  assess- 
ers,  etc.  Seligman  has  defined  these  as  "*^"'«- 
follows :  "  A  special  assessment  is  a  compulsory 
contribution  paid  once  and  for  all  to  defray  the  cost 
1  See  Part  I.,  Chap.  IH.,  sec  4. 


116         INTRODUCTION   TO   PUBLIC  FINANCE     part  i\ 

of  a  specific  improvement  to  property  undertaken  ii\ 
the  public  interest,  and  levied  by  the  government  in 
proportion  to  the  special  benefits  accruing  to  the  prop- 
erty owner."  He  regards  them  as  of  so  much  impor- 
tance ^s  to  make  them  a  class  of  revenues  coordinate 
with  taxes  and  fees.  Strictly  speaking,  they  are  fees. 
4^Sec.  7.  The  revenues  derived  from  the  rates 
charged  for  the  services  rendered  by  the  indus- 
trial activities  of  the  State,  or  from  the  production 
and  sale  of  commodities,  so  long  as  these  enterprises 
_,  are  conducted  for  profit,  are  of  the  same 

The  nature  ^ 

of  public  general  character  as  the  earnings  of  the 

rates.  people.      Early  writers  on  public  finance 

devote  a  great  deal  of  attention  to  the  income  of  the 
State  from  the  public  domain,  forests,  and  mines, 
which  were  at  one  time  of  great  relative  importance. 
These  have  shrunk  in  importance,  in  modern  times, 
but  in  their  place  have  come  the  earnings  of  the  so- 
called  "  public  service "  enterprises,  like  the  rail- 
roads and  the  street  railways,  telegraph  and  telephone 
service,  water  works,  and  others  of  a  similar  character. 
As  stated  in  another  connection,  these  enterprises  are 
usually  monopolies.  Even  when  they  are  not  of  such 
a  character  that  they  would  be  monopolies  even  under 
private  control,  the  government  makes  them  monopo- 
lies by  refusing  to  allow  any  private  enterprise  to 
compete.  The  French  tobacco  monopoly  affords  in 
part  an  example  of  this.  Industrial  enterprises  con- 
ducted by  a  government  for  profit,  under  competitive 
conditions,  are  rare.     The  general  analysis  of  these 


CHAP.  II  TAXES,   FEES,  AND  RATES  II7 

earnings,  whether  monopolistic  or  competitive,  can  be 
found  in  any  good  treatise  on  Economics  and  need 
not  be  repeated  here. 

Public  rates,  however,  differ  in  some  respects  from 
the  charges  made  by  similar  private  enterprises. 
The  differences  can  be  most  readily  shown  by  an 
illustration.  Let  us  suppose  that  a  certain  city  is 
supplied  with  water  by  two  private  companies,  both 
of  which  have  the  right  to  lay  pipes  wherever  they 
wish.  They  will  then  supply  water,  supposing  that 
they  actually  compete,  at  rates  determined  mainly  by 
the  costs,  which  are  those  of  management, 
interest  on  the  "  plant,"  the  cost  of  water,  the  water 
and  of  the  supplies  and  the  general  run-  ^PP^y- 
ning  expenses.  The  average  rates  will  be  consider- 
ably higher  than  need  be  by  virtue  of  the  duplication 
of  the  plant,  etc.  Suppose,  however,  before  any  ma- 
terial duplication  is  reached  the  companies  unite, 
forming  one  company  which  has  the  monopoly.  The 
charges  will  now  be  regulated  by  "  what  the  traffic 
will  bear,"  and  provided  the  supply  is  ample  will 
tend  to  conform  to  those  rates  which  will  yield  the 
largest  net  returns.  The  principles  by  which  mo- 
noply  rates  are  regulated  are  well  known  to  students 
of  economics.  The  charges  in  this  case  cannot  be 
greater  than  the  cost  to  the  citizens  of  operating 
their  own  wells,  nor  even  so  high  as  to  induce  the 
citizens  to  economise  materially  in  their  use  of 
water.  But  suppose  that  the  townspeople  are  not 
content  with  the  rates   or  with  the  service.     They 


118        INTRODUCTION  TO  PUBLIC  FINANCE     tARi  i: 

attempt  regulation  and  fail.  They  may  determine 
to  buy  out  the  plant.  Once  the  city  owns  the 
The  four  plant  it  may  run  it  in  one  of  four  ways. 

methods  of        Q\  j^  jjjg^y  p^n  it  as  the  company  did,  to 

public  man- 
agement, make  the  highest  possible  profits,  charg- 
ing all  or  nearly  all  the  traffic  will  bear.  The  sur- 
plus over  costs  goes  into  the  treasury  and  helps  to 
defray  the  other  expenses  of  government.  The 
rules  determining  what  the  traffic  will  bear  are 
rules  of  pure  economics.  There  is  absolutely  no 
difference  between  this  public  business  and  a  private 
business.  The  method  of  "  charging  what  the  traffic 
will  bear"  is  the  method  in  economic  life  of  deter- 
mining the  value  of  commodities  so  sold.  It  takes 
the  place  in  the  sale  of  monopoly  goods  of  the  "free 
dickerings  of  the  market"  by  which  the  price  of  other 
goods  is  determined. 1  The  private  company  had  to 
pay  expenses,  so  does  the  city  ;  the  private  company 
enjoyed  a  surplus  or  made  an  "  unearned  increment," 
so  does  the  city ;  the  private  company  spent  this  sur- 
plus to  the  satisfaction  of  the  wants  of  its  stockliold- 
ers;  the  city  spends  the  surplus  for  the  benefit  or  for 
the  satisfaction  of  the  general  wants  of  the  citizens, 
who  may  be  regarded  as  its  stockholders.  Even  if 
it  foregoes  taking  quite  all  the  surplus,  the  principle 
is  the  same.  A  private  company  sometimes  does 
that  in  deference  to  public  opinion.     (2)  The  city 

iSee  Sidgwick,  Bk.  II.,  Chap.  X.;  Andrews,  Institutes  of  Eco- 
nomics, ip.  122;  Marshall,  Ec,  of  Ind.,  pp.  180  ff.;  Senior,  pp. 
103-114;  Sumner,  Essays,  p.  46;  Hadley,  B.  B.  Trans.,  ^.  100; 
Seligman,  Railway  Tariffs,  etc.,  pp.  8  ff.      . 


CHAP.  II  TAXES,   FEES,   AND  RATES  119 

may  decide  not  to  make  money,  but  to  charge  only 
what  the  service  costs  and  make  the  service  as  good 
as  possible.  It  then  foregoes  taking  the  full  price  of 
the  wealth  that  it  has  produced  and  allows  each  con- 
sumer to  enjoy  the  surplus.  Then  the  payment  by 
the  citizen  is  a  fee.  (3)  It  may  charge  a  fee  much 
smaller  than  the  cost,  or  a  fee  for  all  water  consumed 
over  a  certain  amount,  but  provide  a  certain  amount 
of  water  for  each  citizen  at  the  common  cost.  (4)  It 
may  distribute  the  water  free  of  charge  and  pay  for 
it  out  of  the  common  fund  derived  from  taxation. 
Now  the  sums  received  in  the  last  three  cases  only 
are  fiscal  in  character. 

In  this  connection  it  is  important  to  note  that  there 
is  a  strong  tendency  for  a  government  to  abandon 
the  economic,  or  profit  making,  method  of  managing 
such  enterprises  and  to  pass  to  some  one  of  the  fiscal 
methods.  That  is,  the  government's  method  of  con- 
ducting a  public  service  does  not  usually  continue 
to  follow  that  of  private  management.  The  tendency 
Thus,  for  example,  it  would  be  natural,  to  abandon 

^  ^  rates  for  fees 

and  perhaps  proper,  for  a  private  water  and  fees  for 
company  to  keep  a  "large  capital  account "  '«^^*- 
and  to  carry  a  heavy  interest  or  dividend  charge 
against  the  earnings.  But  when  a  government  has 
paid  off  in  whole  or  in  part  the  debt  contracted 
when  it  acquired  the  plant,  it  is  not  uncommon  to 
drop  the  interest  charge  and  toreduce  the  rates  in 
proportion  to  the  reduced  costs.  The  reason  for 
making  such  an  enterprise  a  government  function  is 


120         INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 

the  recognition  of  some  public  interest  or  benefit, 
and,  for  the  same  reason,  the  fiscal  method  of  admin- 
istration is  the  more  appropriate.  Some  writers 
have  even  gone  so  far  as  to  suggest  this  as  a  sort  of 
test  as  to  whether  any  given  enterprise  should  be 
taken  over  as  a  government  function.  They  say,  in 
substance,  that  if  the  people  are  not  willing  to  see 
the  enterprise  in  question  conducted  on  fiscal  princi- 
ples, they  should  not  make  it  a  government  function, 
for  it  will  probably  pass  on  into  one  of  the  three  fiscal 
methods  of  management  above  outlined  and  may  in 
time  reach  the  last. 

As  Cohn  has  so  well  pointed  out,  it  is  a  very  dif- 
ferent problem  that  we  have  to  deal  with  when  the 
Taxation  by  management  of  some  industry  is  made 
^dv^triaimo-  ^^rcly  the  form  or  means  for  collecting 
nopoiy.  a   tax   from    certain  classes  of  persons. 

The  French  tobacco  monopoly,  for  example,  is  not  in 
any  sense  to  be  looked  upon  as  an  industry  under- 
taken in  the  common  interest,  or  even  in  the  interest 
of  a  particular  class.  It  is  the  aim  of  the  French 
government  to  tax  the  users  of  tobacco.  This  aim  is 
attained  by  other  governments  through  different  pro- 
cesses. The  form  of  a  inonopoly  has  been  found  to 
be  remarkably  easy,  expedient,  and  successful  as  a 
method  of  indirect  taxation. 

Sec.  8.  This  section  will  be  devoted  to  the  definition 
Definitions :  of  terms  used  in  connection  with  revenues. 
The  "  base."  The  basc  of  a  tax  is  the  thing,  character- 
istic, or  phenomenon  by  the  possession  of  which  the 


CHAP.  II  TAXES,   FEES,  AND  RATES  121 

amount  that  each  taxpayer  shall  contribute  is  to  be 
measured,  or  it  is  that  upon  which  the  tax  is  "levied." 
The  base  is  not  always,  although  it  may  be,  the  source 
from  which  the  tax  is  paid.  Thus  a  tax  based  on  prop- 
erty is  generally  paid  out  of  the  income,  or  revenue, 
which  flows,  sometimes  from  the  property,  sometimes 
from  other  sources,  while  a  tax  on  income  would  be, 
normally,  paid  from  the  same  income  that  constitutes 
the  base.  The  direct  taxes  are  almost  always  called 
by  the  name  of  the  base  ;  indirect  taxes  are  seldom  so 
named.  The. base  is  often  expressed  in  units  of 
value  ;  as,  for  example,  flOO  worth  of  property.  It 
may,  however,  be  expressed  in  terms  of  some  other 
units  of  measurement,  as  yards,  tons,  acres,  barrels ; 
or  again  by  mere  count,  as,  one  poll,  one  ox,  etc. 
When  the  base  is  expressed  in  terms  of  value,  the  tax 
is  sometimes  called  an  "  ad  valorem  "  tax.  i'j^^^aiorem" 
When  the  base  is  expressed  in  terms  of  and"specific" 
some  unit  of  measurement  other  than 
value,  the  tax  is  sometimes  called  "specific."  But 
neither  of  these  terms  is  applied  to  certain  kinds  of 
taxes,  such  as  poll  taxes,  income  taxes,  or  inheritance 
taxes.  Sometimes  the  unit  of  the  base  is  complex 
and  arbitrary.  For  example,  in  Vermont,  the  base 
of  the  general  property  tax  is  each  dollar  in  the 
"  Grand  List."  But  only  one  per  cent  of  the  true 
value  of  the  property  of  each  taxpayer  is  "  set  in  the 
list,"  while  his  poll  is  also  "  set  in  the  list,"  at  an 
arbitrary  valuation  of  $100.  This  complexity  of  the 
base  arose,  originally,  from  the  custom  of  fixing  an 


122         INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 

arbitrary  uniform  value  for  each  piece  of  property, 
as  so  much  per  acre  of  land,  so  much  per  head  of 
cattle,  so  much  per  horse,  irrespective  of  actual  value. 
Other  cases  of  such  complex  bases  usually  have  some 
similar  historical  origin. 

The  rate  is  the  amount  of  tax  that  falls  upon  each 

unit  of  the  base.     The  rate,  whether  for  specific  or 

ad  valorem  taxes,  may  be  proportional 

The ''rater  ,.  .         !        -r        •  •         , 

or  disproportional.  It  is  proportional 
when  it  is  always  in  the  same  proportion  to  the  base, 
whether  the  amount  held  by  a  taxpayer  or  subject  to 
the  tax  be  large  or  small. 

The  important  thing  to  observe  in  connection  with 
proportional  tax  rates  is  the  way  in  which  the  rate  is 
"Propor-         arrived  at.     It  often  occurs  that  a  gov- 

tioned"  and  <     i       •  •  •  j    n     'j.  2. 

,.      ,„  ernment  desires  to  raise  a  definite  amount 

apportioned 

taxes.  of  money  by  a  given  tax,  but  the  aggre- 

gate of  the  base  is  not  known  at  the  time  this  amount 
is  fixed.  It  may  therefore  direct  that  when  the  ag- 
gregate of  the  base  is  ascertained,  the  amount  to  be 
raised  shall  be  divided  by  the  aggregate  of  the  base 
and  the  quotient,  or  the  rate  thus  obtained  shall  be 
applied  in  turn  to  the  amount  of  the  base  held  by 
each  taxpayer,  thus  determining  his  taxes.  Or 
again,  and  this  is  perhaps  more  important,  a  central 
government  may  apportion  among  its  local  divisions 
the  total  amount  to  be  raised,  assigning  a  lump 
sura  to  each,  and  the  local  government  of  each  divi- 
sion may  apportion  its  share  among  its  taxpayers  in 
the  manner  above  described.     In  the  latter  case  the 


CHAP.  II  TAXES,  FEES,  AND  RATES  123 

"  rate,"  so  far  as  individual  taxpayers  are  concerned, 
will  vary  from  one  local  division  to  another.  When 
eitlier  method  is  followed,  the  rate,  or  even  the  tax 
itself,  is  often  called  "apportioned."  This  distinc- 
tion is  especially  important  in  the  United  States, 
where  most  of  the  state  taxes  ajfe  apportioned  in  this 
manner.  In  many  instanciS,  however,  the  govern- 
ment fixes  the  rate  in  advance,  and  is  content  to  ac- 
cept the  revenues,  be  they  large  or  small,  which  the 
rate  so  fixed  will  yield.  It  is  true,  however,  that 
even  in  these  cases  there  is  a  rough  sort  of  appor- 
tionment made  before  the  rate  is  fixed,  otherwise  the 
revenue  might  be  too  large  or  too  small.  Fixed  pro- 
portionate rates  are  sometimes  laid  down  by  some 
superior  authority  to  limit  the  extravagance  of  lower 
governmental  bodies. 

Disproportionate   rates  are  rates  which  in  them- 
selves vary  as  the  amount  of  the  base  held   "Dispropor- 
by    different    taxpayers    varies.     These  J^^^^^ 
rates  may  be  progressive  or  regressive. 

Progressive  rates  are  the  most  important  general 
class  of  disproportionate  rates.     This  term  is  applied 
when  the  rate  is  proportionately  higher 
for  a  taxpayer  who  is  taxable  for  a  large  ^^J^ 
amount  of  the  base  than  for  one  who  is 
taxable  for  a  smaller  amount.     That  is,  the  fraction 
taken  is  ever  larger,  the  larger  the  amount  of  the 
base  possessed  by  the  individual  taxpayer. 

Progressive  rates  may  be  regular  or  irregular  ac- 
cording as  they  increase  by  some  fixed  mathematical 


124         INTRODUCTION   TO  PUBLIC  FINANCE     part  il 

rule  or  increase  in  some  more  or  less  arbitrary  man- 
ner. There  are  very  few  regular  progressive  tax 
rates  in  actual  practice.  Arithmetical,  or  geometri- 
cal progression  would  give  regular  progression  and 
so  would  many  other  mathematical  formulas,  notably, 
some  of  those  of  calculus.  Of  course,  many  forms 
of  regular  progression  would,  if  continued  long 
enough,  reach  a  rate  equal  to  one  hundred  per  cent 
of  the  base.  As  this  results  in  practical  confiscation, 
such  an  extreme  is  seldom  provided  by  law.  Usu- 
ally, after  a  certain  relatively  high  point  is  reached, 
the  progression  is  more  or  less  arbitrarily  stopped 
and  a  proportional  rate  is  substituted.  Were  the 
progression  to  be  continued  until  it  resulted  in  con- 
fiscation the  motive  would  not  be  a  fiscal  one,  for 
such  a  policy  would  diminish  the  revenue  by  ulti- 
mately cutting  down  the  aggregate  of  the  base.  In 
fact,  as  we  shall  see  later,  the  motive  for  a  progres- 
sive rate  is  always  something  other  than  the  purely 
fiscal  one. 

One  of  the  most  common,  and  certainly  one  of  the 
most  important  forms  of  progression  is  that  called 
"Degressive"  "degressive."  In  this  case  the  rate  (as 
rates.  distinct  from  the  tax)  increases  but  by 

an  ever  decreasing  increment.  In  perfectly  regular 
degression  the  rate  would  be  so  arranged  that  it 
would  constantly  approach  but  never  quite  reach  a 
given  proportional  rate  as  a  limit.  It  Avould  be  cum- 
bersome to  accomplish  this  result  by  varying  the 
nominal  rate.     But  practically  the  same  end  can  be 


CHAP.   II 


TAXES,  FEES,  AND  RATES 


125 


reached  by  the  simple  expedient  of  deducting  from 
each  of  the  ascending  amounts  of  the  base  a  fixed 
amount,  that  is,  technically  untaxed,  and  applying  to 
the  remainder,  in  each  case,  a  nominally  proportioned 
rate. 

Diagram  A  illustrates  a  theoretical  form  of  regu- 
lar degressive  taxation,  which  may  be  regarded  as  an 
ideal.  The  diagram  is  drawn  on  the  assumption 
that  a  constant  amount  "  C  "  is  deducted  from  each 
and  every  amount  of  the  base,  be  the  base  large  or 
small,  and  that  the  remainder  is  subject  to  a  propor- 
tional tax  of  "  R,"  which  thus  becomes  the  limit, 
which  the  rate  constantly  approaches  but  never 
reaches. 

DIAGRAM  A 
A  Typical  Form  of  Regular  Degressiow 


1 1 1 1 1 1 1 1 1 laj 


c  mj.    ma    m^    m^    m^    m^    rtij    m^    rug   niio  m^  »^,g  mja  mn 


In  actual  practice  such  regularity  as  is  assumed  in 
the  chart  is  seldom  found.  The  regularity  may  be 
broken  by  changing  the  amount  of  the  deduction  al- 
lowed at  different  stages,  or  by  cutting  it  off  alto- 
gether. 

Diagram  B  represents  the  beginning  of  the  sched- 
ule of  rates  of  the  British  income  tax,  as  it  was  under 


126 


INTRODUCTION  TO  PUBLIC  FINANCE     part  ii 


the  law  of  1898,  when  the  rate  was  fixed  at  eight 
pence  per  pound.  The  deductions  allowed  were 
.£160  up  to  an  income  of  X400  ;  then  X150  up  to  an 
income  of  .6500  ;  then  X120  to  X600  ;  £70toX700; 
after  which  no  deduction  is  allowed.  As  will  be 
readily  seen  this  carries  fairly  regular  degression  up 
to  £700,  after  which  the  rate  is  proportional. 

DIAGRAM  B 

British  Income  Tax,  Form  of  1898.    Rate,  8d.  per  £ 

Slightly  Irregular  Degression,  ending  in  Proportion 


^ 

,^ 

-^ 

A 

/ 

£  100  200  300  400  500 


700  800  900  1000  1100  1200  1300  1400 


Progressive  tax  rates  are  often  graduated  ;  that  is, 
the  rate  increases  by  grades  or  stages  of  the  amounts 
of  the  base,  and  is  either  proportional  or  fixed 
within  each  grade.  From  this  practice  it  is  very 
common  to  speak  of  all  progressive  taxes  as  "  gradu- 
ated taxes."  It  is  probably  safe  to  say  that  the  term 
"  graduated  "  is  more  widely  used  in  this  connection, 
and  perhaps  better  understood  than  the  term  "  pro- 
gressive." 

Diagram  0  represents  a  somewhat  complex  form 
of  the  graduated  tax.  But  it  is  a  form  which  with 
modifications  as  to  details  and  rates  is  very  frequently 


CHAP.   II 


TAXES,  FEES,  AND  HATES 


127 


found  and  is  found  in  connection  with  many  im- 
portant taxes.  The  diagram  shows  the  first  ten 
grades  of  the  long  series  of  grades  in  the  Prussian 
income  tax,  as  it  was  in  1891.  It  is  a  form  that  is 
intended,  broadly  speaking,  to  result  in  a  series  of 
rates  that  impose  a  generally  degressive  tax.  But 
on  account  of  the  fixed  rate  within  each  grade,  and 
of  the  change  in  rates  from  grade  to  grade  by  round 
numbers  only,  the  resulting  schedule  is  regressive 
within  each  grade,  and  occasionally  regressive  from 
grade  to  grade.  If  the  rates  were  proportional 
within  each  grade,  the  chart  would  show  a  series  of 
horizontal  steps. 

DIAGRAM  C 


First  Ten  Grades  of  the  Prussian  Income  Tax,  1891 
Graduated  Degression,  Regression  in  Each  Grade 


Pw 

>,r 

^^ 

-- 

^ 

r 

J- 

r^ 

-T 

^ 

MARKS   600  800  1000  1200  1400  IGOO  1800  2000  2200  2400  2600  2800 

Many  other  forms  of  progressive  rates  have  been 
devfsed.  They  are  found  in  a  great  many  different 
kinds  of  taxes,  but  are  most  common  in  income  and 
inheritance  taxes.  The  theory  of  progressive  taxa- 
tion is  discussed  in  another  connection. 

The  rate  is  regressive  when  it  is  the  reverse  of  the 


128  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

progressive,  that  is,  when  it  is  higher  for  the  taxpayer 
who  has  a  small  amount  of  the  base  than  for  one  who 
"Regressive"  ^'^^  ^  large  amount.  This  is  usually  re- 
taxation.  garded  as   an    unjust  mode  of  taxation, 

and  when  it  occurs,  it  is  usually  an  accidental  or  un- 
intentional result.  Sometimes  it  is  brought  about 
by  the  evasion  or  partial  evasion  of  taxation  by  those 
who  should  be  the  heavier  taxpayers.  It  is  occasion- 
ally adopted  intentionally,  as  when  it  is  desired  to 
exterminate  small  saloons  and  drinking  places  by  a 
higher  license  tax  than  is  imposed  on  the  larger  ones. 
It  is  safe  to  say  that  whenever  regressive  rates  are 
found,  they  are  either  accidental  qi:  their  purpose  is 
distinctly  non-fiscal.  The  regressive  rates  are  in 
practice  never  very  regular  in  form,  even  less  so  than 
the  progressive  rates,  but  theoretically  they  can  be 
quite  as  regular  in  form  as  the  latter. 

It  should  be  noted  that  graduated  taxes  are  usually 
regressive  within  each  grade;   that  is,  the  tax  is  a 

I  ik  t«  V  Cl^ 

^omallor  proportion  of  the  base  for  a  taxpayer  who 
Graduated  is  just  ovcr  the  lowcr  limit  than  for  one 
axes  are  re-      ^-^^  ^^  ^^  ^^  near  the  uDDcr  limit  of  the 

gressive  in  ^^ 

each  grade.  grade.  Strictly  speaking,  every  so-called 
proportional  tax  is  graduated  and  consequently  re- 
gressive within  each  grade.  This  is  because  the  rec- 
ognised unit  of  the  base,  be  it  a  pound,  a  dollar,  a 
penny  or  a  cent,  constitutes  a  grade  and  necessarily 
takes  the  same  rate  throughout.  But  when  the  unit 
of  the  base  is  small,  this  graduation  and  regression  is 
of  so  little  importance  that  it  is  ignored. 


CHAP.  II  TAXES,   FEES,  AND  RATES  129 

Impost  is  a  general  term  for  any  tax,  but  there 
is   a   tendency  to   make  it  synonymous 
with  indirect  taxes.  m-pos . 

Customs  duties  are  indirect  taxes  levied  on   the 
goods  imported   into   or   exported  from  ,,^ 
certain  territories.  duties:' 

Excises  (English)  or  internal  revenue  taxes  (Amer- 
ican) are  indirect  taxes  levied  on  g-oods  .,„    .     „ 

•^  o  "Excises     or 

produced  or  consumed  within  certain  ter-  "internal  rev- 

ritorial  limits.  enue  taxes." 

Toll  was  originally  a  general  term  for  many  taxes, 
but  it  has  come  to  have  a  special  mean- 

"  Toll " 

ing,  and  applies  only  to  the  charges  for 
passage  over  roads,  bridges,  canals,  etc. 

A  tax  is  said  to  be  shifted  when  the  taxpayer 
reimburses  himself  from  some  one  else,   ugj^^f^^^  » 
The   final   incidence   of  the   tax   is   the  and"inci- 
falling  of   the   burden    upon  some   per-      ^'^' 
son  who  does  not  shift  it. 

Two  terms  of  great  importance  in  connection  with 
taxation  are  "levy"  and  "assessment." 

The  term  "  levy  "  covers  all  the  legal  processes  of 
imposing  a  tax  and  making  its  payment  compulsory. 
It  is  an  act  of  the  supreme  authority  of  "Levy"  and 
government.  "  Whatever  else  it  may  be,"  "assessment." 
says  Mr.  John  Fiske,  ^  "  the  government  is  the  power 
that  taxes."  Conversely  no  tax  can  be  imposed  ex- 
cept by  governmental  authority.  In  England  and 
the  United  States  the  power  to  levy  taxes  is  a  jeal- 
1  Civil  Government  in  the  United  States^  p.  7. 


130  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

ously  guarded  prerogative  of  the  legislative  depart- 
ment. Two  of  the  commonest  provisions  of  the 
constitutions  of  the  commonwealths  of  the  United 
States  are  in  effect:  (1)  that  "the  power  of  taxa- 
tion shall  never  be  surrendered  or  suspended  by 
any  grant  or  contract  to  which  the  State  shall  be* 
a  party."  (2)  "No  tax  shall  be  levied  except  in 
pursuance  of  law."  Only  in  countries  having  a 
system  of  administrative  law  is  there  a  seeming 
departure  from  this  principle.  \ 

After  the  legislative  or  the  equivalent  authoritjj 
has  levied  a  tax,  the  next  step  is  the  "  assessment 
This  term  covers  the  acts  and  proceed 

"Assessment."  .  .  . 

ings  of  the  administrative  officers  in  de 


^ 


3 


termining  the  amount  of  taxes  each  taxpayer  is 
pay.  By  metonymy  it  is  often  restricted,  in  com- 
mon usage,  to  the  most  important  process  involved. 
Thus  in  the  United  States  in  connection  with  the 
administration  of  the  general  property  tax,  the  term 
"  assessment "  is  often  used  as  though  it  were  synon- 
ymous with  the  "  valuation  "  of  the  property. 

While  legally  and  logically  the  levy  of  a  tax  in- 
volves fixing  the  rate,  and  while  theoretically  this 
The  levy  of  a  part  of  the  Icvy  can  no  more  be  delegated 
'^ii/uZ^'  ^y  ^^^  legislative  authority  to  any  one 
tion.  else  than  can  any  other  part  of  the  levy, 

nevertheless,  a  seeming  delegation  of  this  power  often 
occurs.  Thus  some  executive  department  may  be 
instructed  to  ascertain  that  rate  which  will  yield  a 
certain  sum  of  money,  and  this  rate,  although  un- 


CHAP.  II  TAXES,   FEES,  AND  RATES  131 

known  at  the  time  the  law  is  enacted,  is  declared 
therein  to  be  the  legal  rate.  This  is  only  a  seeming 
evasion  of  the  fundamental  principle  ;  for  the  execu- 
tive department  on  which  this  duty  is  imposed  has 
no  discretionary  powers  and  merely  makes  a  mathe- 
matical computation,  the  result  of  which  it  has  no 
power  to  alter.  Unquestionably  illegal  is  the  not  un- 
common practice  of  such  executive  boards  of  round- 
ing out  the  rate  to  some  whole  number,  or  to  some 
convenient  fraction,  so  as  to  simplify  the  extensions 
on  the  tax  bills.  But  this  is  such  a  trivial  matter 
that  the  courts  do  not  regard  the  tax  levy  as  invali- 
dated by  such  a  proceeding. 

The  tax  list  or  roll,  which  is  also  known  by  many 
other  names,  contains  the  record  of  the  assessment. 
In  many  cases,  notably  on  the  continent 

r.    ^  /  ,.  »  .       The"taxlist:' 

of  Europe,  these  lists  are,  for  certain 
taxes,  elaborate,  permanent  or  partly  permanent  rec- 
ords, which  may  serve  various  legal  purposes  as  well 
as  the  fiscal,  as  for  example  the  record  of  titles,  and  are 
called  "cadastres."  When  the  same  tax  is  used  by 
several  different  departments  of  government,  as,  for 
example,  by  the  cities,  counties,  provinces,  or  other 
divisions  of  local  governments  and  also  by  the  State 
or  central  government,  the  initial  tax  list  or  the  orig- 
inal, may  be  retained  and  filed  in  each  local  office  or 
tax  bureau,  and  a  duplicate  thereof  sent  up  to  the 
higher  department  or  division  of  government.  When 
a  number  of  these  duplicates  are  brought  together, 
the  combined  list  is  designated  by  some  distinguish- 


132  INTRODUCTION   TO  PUBLIC  FINANCE    part  il 

ing  name,  such  as  the  "  grand  duplicate,"  the  "  grand 
list,"  or  some  other  similar  term. 

"  Rate,"  when  used  alone  without  the  prefix  "  tax," 
is  a  term  applied  in  England  to  many  local  taxes,  as 
"Rate"  mean-  the  "  poor  rates,"  or  simply  "the  rates," 
ing  a  tax.  ^nd  in  that  country  often  carries  the  dis- 
tinction between  local  taxes  and  general  taxes.  In 
America  local  taxes  for  the  maintenance  of  the  water 
systems  are  not  infrequently  called  "water  rates," 
but  the  term  does  not  carry  the  same  meaning  as  in 
England. 

There  is  a  tendency  among  careful  publicists  to 
use  the  term  "  rate "  to  designate  the  price  paid  by 
a  consumer  for  some  product  of  a  public  industry 
when  the  government  has  a  monopoly  thereof.  Thus 
"Rates"  as  ^®  generally  speak  of  postage  rates,  tele- 
chargesfor  graph  ratcs,  railroad  rates,  water  rates, 
jmhiic  service,  gag  ratcs,  and  the  like.  The  term  "  price  " 
would,  if  this  usage  were  universal,  be  applied  in 
public  finance  only  to  those  charges  which  are  made 
for  goods  produced  by  public  industries  under  com- 
petitive or  quasi-competitive  conditions.  If  this 
usage  could  become  universal,  it  would  be  conducive 
to  clearness. 


CHAPTER  III 

THE  TAX   SYSTEM 

Section  1.  No  nation  has  ever  found  it  feasible 
to  adopt  any  single  tax  as  the  sole  source  of  its 
income.  No  nation  at  all  advanced  in  civilisation 
has  attempted  to  conduct  its  government  entirely 
from  the  earnings  of  its  domains  or  industries. 
Every  civilised  nation  of  to-day  combines  the  three 
sorts  of  revenues,  those  produced  by  its  own  activi- 
ties and  those  obtained  from  taxation  and  from  fees. 
And  furthermore,  no  nation  attempts  to  exist  with 
only  one  of  each  of  these  kinds  of  revenues.  These 
different  forms  are  combined  into  a  y,  ^ 
"  system  "  or  general  scheme,  which  con-  of  various 
forms  more  or  less  closely  to  the  general  f.^^^  «^«/'<'"*- 

•^  <^  oinea  into  the 

ideal  of  justice  which  may  have  been  national  sys- 
adopted  by  the  nation.  To  judge  of  the  ^'^' 
justice  or  expediency  of  any  tax  it  should  be  studied 
in  its  place  in  the  "system."  We  have  already  seen 
the  two  main  theories  as  to  the  proper  measure  of 
taxation ;  the  one,  that  taxation  should  be  measured 
by  benefit ;  the  other,  that  it  should  be  measured  by 
faculty.  A  perfect  system  would  so  combine  the 
different  forms  that  the  total  burden  imposed  would 
be  in  accord  with  the  ideal  adopted. 

133 


134  INTRODUCTION  TO  PUBLIC  FINANCE    part  n 

There  is  a  constant  tendency  toward  the  simplifi. 
cation  of  tax  systems,  although  most  modern  systems 
The  dream  of  ^^e  stiU  extremely  complicated.  It  is 
a  single  tax.  i\^q  (Jream  of  financial  theorists,  and  has 
been  ever  since  the  science  began,  and  it  is  the  aim 
of  many  would-be  reformers,  to  find  a  single  tax  that 
will  furnish  all  the  necessary  funds  for  the  support 
of  the  government.  The  physiocratic  impSt  unique 
on  the  produit  net  is  well  known,  as  is  also  the  jus- 
tification therefor.  It  is  also  well  known  wherein 
this  fails.  Modern  proposals  generally  involve  some- 
thing more  than  mere  tax  reform.  The  socialistic 
^ngi-epro-  demand  for  a  single,  exclusive  income 
gressive  in-       ^g^x  with  a  progressive  rate  is  advanced 

come  tax,  and  •   ■,         ^  p       nr        •  t         •  • 

the  Georgian  With  a  hopc  of  efcecting  a  redistribution 
land  tax.  of    ^}^q    wealth    of    the   world.     Henry 

George's  well-known  scheme  for  a  single  tax  on  land 
has  a  similar  ulterior  purpose.  His  object  is  to  free 
industry  from  trammels  which  he  supposes  are  due 
to  the  appropriation  of  land  values  by  private  indi- 
viduals. In  form  his  proposition  is  not  very  unlike 
that  of  the  Physiocrats.  He  is  an  extreme  individu- 
alist, but  he  aims,  like  the  socialists,  at  a  new  distri- 
bution of  property.  Of  these  two  modern  schemes 
for  a  single  tax  the  first  is  perfectly  feasible  from  the 
fiscal  point  of  view.  Such  a  tax  could  probably  be 
administered  and  could  be  made  to  yield  ample 
revenue.  It  fails,  however,  to  answer  the  simplest 
requirements  of  justice.  For  example,  it  would  not, 
unless  our  whole  scheme  of  economic  life  were  first 


CHAP.  Ill  THE   TAX  SYSTEM  135 

altered,  seem  just  that  the  man  whose  property  was 
benefited  by  the  grading  and  metalling  of  a  street 
should  be  entirely  free  from  a  special  The  socialistic 
charge    for    the     special    benefit.     The  f^«!^f'«^ 

*^  ^    ^  feasible  out 

scheme  is  inexpedient  for  three  reasons  :  unjust. 
(1)  it  presupposes  for  its  successful  administration 
a  method  of  distribution  of  wealth  very  different 
from  that  which  the  world  now  has ;  (2)  it  demands 
a  perfection  in  the  technique  of  administration  as 
yet  absolutely  unattainable  ;  (3)  it  would  need,  in 
order  to  be  fairly  administered,  more  honesty  than 
men  have  yet  shown  in  their  dealings  with  the  gov- 
ernment. None  of  these  reasons  militate  in  the  least 
against  the  incorporation  of  an  income  tax  in  the 
tax  system,  beside  other  taxes.  They  apply  only  to 
its  use  as  the  sole  source  of  revenue. 

Mr.  Louis  F.  Post,  official  lecturer  for  the  Single- 
tax  League,  gives  the  following  explanation  of  the 
second  most  prominent  form  of  a  single  tax. 

"  The  practical  form  in  which  Henry  George  puts 
the  idea  of  appropriating  economic  rent  to  the  com- 
mon use  is  '  To  abolish  all  taxation  save  that  upon  land 
values.'  This  is  now  generally  known  as  '  the  single 
tax.'  Under  its  operation  all  classes  of  workers, 
whether  manufacturers,  merchants,  bankers,  profes- 
sional men,  clerks,  mechanics,  farmers,  farm-hands, 
or  other  working  classes,  would,  as  such,  jj^^ 
be  wholly  exempt.  It  is  only  as  men  _  George' a^singh 
who  own  land  that  they  would  be  taxed, 
the  tax  of  each  being  in  proportion,  not  to  the  area, 


136  INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 

but  to  the  value  of  his  land.  And  no  one  would  be 
compelled  to  pay  a  higher  tax  than  others  if  his  land 
were  improved  or  used  while  theirs  was  not,  nor  if 
his  were  better  improved  or  better  used  than  theirs. 
The  value  of  its  improvements  would  not  be  con- 
sidered in  estimating  the  value  of  a  holding;  site 
value  alone  would  govern.  If  the  site  rose  in  the 
market,  the  tax  would  proportionately  increase  ;  if 
that  fell,  the  tax  would  proportionately  diminish."  ^ 
A  fall  discussion  of  the  economic  and  social  effects 
of  Henry  George's  single  tax  would  carry  us  far  be- 
yond the  scope  of  this  book.  The  argument  for 
the  single  tax,  as  a  mode  of  taxation  alone,  is  far 
from  complete  by  itself.  In  so  far  as  it  can  be  stated 
The  argument  separately  it  has  been  well  given  by  Fille- 
for  the  single  browu.^  His  statement  is  as  follows: 
"a.  The  site  value  of  land  is  a  social 
product,  h.  A  land  tax  cannot  be  '  shifted.''  c.  The 
selling  value  of  the  land  is  an  untaxed  value."  From 
a  he  would  have  us  draw  the  conclusion  that  the 
ground  rent  should  belong  to  the  community  as  a 
whole.  This,  of  course,  involves  the  economic  argu- 
ment for  the  single  tax.  From  h  he  would  have  us 
infer  that  the  only  person  affected  would  be  the 
landlord,  and  from  c  that  "if  all  taxes  are  ulti- 
mately taken  from  rent,  it  follows  that  in  the  course 
of  two  or  three  generations  taxation  may  cease  en- 

1 "  The  Single  Tax,"  p.  1.   Henry  George,  Progress  and  Poverty ^ 
Bk.  VIII.,  Chap.  II. 

2  A.  B.  C.  of  Taxation,  p.  156. 


CHAP.   Ill  rHE    TAX  SYSTEM  I37 

tirely  from  being  a  burden  upon  any  one."  1  In  the 
first  edition  of  this  book  there  was  a  discussion  of  the 
probable  sufficiency  of  the  revenues  which  could  be 
obtained  from  this  source,  and  figures  were  presented 
from  which  the  author  was  inclined  to  draw  the  con- 
clusion that  the  entire  ground-rent  would  in  most 
communities  be  less  than  the  revenues  now  '^he  sujgn- 
being  spent  by  the  government.  Those  Tev^JsfrL 
figures  have  been  questioned,  and  it  is  the  single  tax. 
difficult,  if  not  impossible,  to  get  any  that  both  sides 
to  the  controversy  would  be  willing  to  accept.  But 
it  appears  to  the  author  on  more  mature  considera- 
tion that  the  point  is  not  quite  pertinent.  Because, 
if  it  were  admitted  on  the  one  hand  that  all  taxes 
other  than  those  on  land  values  were  unjust,  then  it 
would  become  the  duty  of  the  government  to  keep 
its  expenditures  within  the  revenues  available.  But 
on  the  other  hand  some  of  the  ablest  among  the 
modern  disciples  of  Henry  George  do  not  lay  full 
stress  on  the  word  "single."  "It  is  a  question  of 
applying  land  values  to  the  common  use  as  far  as 
they  will  go,  or  as  much  of  them  as  may  be  needed, 
as  the  case  may  prove  to  be."  ^ 

Aside  from  any  question  as  to  the  probable  suffi- 
ciency or  insufficiency  of  the  revenues,  the  single 
tax  presents  a  great  many  practical  administrative 
difficulties   for   the  solution   of  which   no   detailed 


1  Op.  cit,  p.  163. 

2  Louis  F.  Post,  The  Single  Tax,  p.  86.    Quoted  approvingly  by 
Fillebrown,  op.  cit.,  p.  154. 


138  INTRODUCTION  TO  PUBLIC  FINANCE    part  n 

suggestions  have  been  offered.  Thus  we  cannot 
Difficulty  of  easily  foresee  how,  under  the  changed 
administer-      cQjjditions,  the  assessmcnt  would  be  made, 

ing  the  single  ' 

tax.  or  how  the  actual  ground-rent  would  be 

ascertained.  It  is  especially  difficult  to  see  how  the 
revenues  would  be  apportioned  among  the  various 
divisions  of  government,  or  what  would  be  the  as- 
signment of  governmental  functions  to  different 
divisions  of  government  under  the  new  regime. 
All  these  difficulties  make  governments  hesitate  to 
plunge  into  so  comprehensive  a  change,  the  outcome 
of  which  it  is  so  difficult  to  foresee. 

If  on  economic  grounds,  or  on  the  ground  of 
general  public  policy,  we  deny  that  any  such  f  unda- 
Economic  oh-  "^^ntal  changes  in  the  modern  system  of 
jectiontothe  land  Ownership,  posscssiou,  or  enjoyment 
sing  e  ax.  ^^^  desirable,  or  that  the  "  private  ap- 
propriation of  ground-rent "  is  in  any  way  a  wrong, 
or  the  cause  of  any  social  or  economic  evils,  then  the 
case  against  the  single  tax  is  clear.  It  would  be 
fundamentally  unjust  because  it  lays  an  unduly 
heavy  burden  on  certain  classes  and  allows  others  to 
go  free  or  at  least  to  enjoy  a  very  considerable  abate- 
ment in  their  contributions  to  the  common  ends  of 
society. 

An  apparent  application  of  the  single-tax  idea  is 
Modern  taxes    fouud  in  the  reccut  extension  of  a  system 

on  the  incre-  p  •    i      j  ,  i  .  » 

mentofiand  ^^  spccial  taxes  ou  the  increment  of 
values.  land   values,    especially    in    large    cities 

in   Germany.     As   these  cities  have  grown  rapidly 


CHAP.  Ill  THE    TAX  SYSTEM  139 

in  population  there  has  come  a  corresponding 
increase  in  land  values.  In  many  cases  the  existing 
tax  systems  have  been  insufficient  to  reach  this  added 
tax-paying  capacity  in  a  manner  that  seemed  adequate 
under  the  new  conditions,  and  consequently  new 
special  methods  of  reaching  it  have  been  devised. 
The  special  taxes  are  usually  based  on  the  so-called 
^'  unearned  "  increment  in  value  and  not  on  any  in- 
crease due  to  actual  outlay  or  improvements  made 
by  the  owner.  They  are  usually  levied  at  the  time 
of  a  transfer,  when  the  actual  increment  of  value 
appears.  The  rates,  while  often  sharply  progressive 
according  to  the  percentage  of  unearned  increment 
over  cost,  are  not  so  heavy  as  to  take  the  entire  in- 
crement. They  accrue,  as  a  rule,  to  the  benefit  of  the 
cities  only.  These  taxes  are  therefore  unlike  the 
"single  tax"  in  that  they  do  not  in  any  event  take 
the  whole  of  the  ground-rent,  whether  as  an  annual 
payment  or  in  capitalised  form. 

Every  tax  tends  to  repress  the  development  of  the 
particular  phenomenon  on  which  it  rests.     A  single 
tax  of  any  kind  will  tend  to  defeat  its  a  single  tax 
own   ends   by  repressing    the    existence  would  de/eai 

•^  -^  ^   ^  .  its  own  ends 

of    the    ph^onienon    which    gives    the  ly  repressing 
signal  for  its  assessment.     For  example,  the  thing  u^n 

°  1      1  T    which  based. 

in    Mexico    land   is    not   taxed,   but    it 
the  farmer  kills  a  cow,  or  sells  a  crop,  he  is  taxed. 
Naturally  this  discourages  any  extension  of  the  uses 
of  land  that  involve  this  disagreeable  consequence. 
The   experience  of   nations    which  has   led  them  to 


140         INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

diversify  the  forms  of  their  taxation  is,  therefore, 
supported  by  theoretical  considerations.  The  tax 
system  of  the  United  States  is  still,  and  the  tax 
systems  of  all  European  nations  have  been,  until 
Tax  system  of  recently,  and  are  yet  in  great  measure, 

modern  no-  .  ■,       ,    ^    -         ^^  p     •x'M'  j.t.' 

tions  not  uierc  accidental  gumbles  of  dinerent  nis- 

logicai.  torical  taxes,  which  are  retained  simply 

for  the  revenue  that  they  yield  and  not  because  of 
any  belief  in  their  justice.  It  is  not  often  that 
nations  are  rich  enough  to  enjoy  what  Professor 
Cohn  has  well  called  the  "  luxury  of  reform  for  re- 
form's sake."  Their  reforms  have  been  most  often 
undertaken  for  the  sake  of  increased  revenues. 

To  be  sure,  the  rough  edges  have  been  some- 
what worn  away  by  the  friction  of  economic  forces, 
and  the  process  of  tax  shifting  has  in  some  in- 
stances removed  some  of  the  worst  injustices.  But 
examined  from  the  standpoint  of  some  ideal  sys- 
tem, the  tax  systems  of  many  modern  nations  fail 
woefully.  It  matters  little  which  ideal  be  the  one 
held  up  by  which  to  test  them  ;  whether  it  be  that  of 
the  benefit  theory,  or  that  of  the  faculty  theory,  the 
failure  is  the  same. 

Sec.  2.  What  in  the  opinion  of  najtions  consti- 
tutes the  ideal  of  correct  or  just  taxation?  The 
answer  to  this  question  is  to  be  sought  in  the 
theories  of  taxation  that  have  found  favour,  and 
are  generally  contained  in  the  writings  of  econo- 
mists and  financiers.  The  Physiocratic  answer 
was,  we  have  seen,  inadequate.     The  benefit  theory 


CHAP.   HI  THE    TAX  SYSTEM  14X 

would  say  that  each  citizen  should  pay  according  to 
the  benefit  he  receives.  What  is  the  benefit  and 
how  is  it  measured?  The  common  benefits  are, 
clearly,  the  peaceful  enjoyment  of  life.  The  benefit 
liberty,  and  property.  The  protection  theory  cannot 
the  State  affords  to  life  and  liberty  is  Txf^{ngZT^  vX 
theoretically  equal  for  all ;  that  to  prop-  emptions. 
erty  might  be  considered  to  vary  as  the  amount  of 
property  varies.  ^  A  uniform  tax  on  each  poll  for  the 
first  two  benefits,  and  a  proportional  tax  on  property, 
would  seem  to  answer  the  requirements  of  this  theory 
with  sufficient  accuracy.  But  the  relatively  small  re- 
turns from  the  poll  taxes  and  the  great  expense  and 
friction  of  collecting  them  soon  led  to  their  partial 
abandonment.  Property  then  remained  the  chief 
basis  under  this  theory.  The  value  of  property 
seemed  clearly  to  depend  on  its  revenue-yielding 
power.  It  is  a  matter  of  comparative  indifference 
which  is  taken.  Hence  the  idea  embodied  in  the 
famous  dictum  of  Adam  Smith  :  "  The  subjects  of 
every  State  ought  to  contribute  toward  the  support 
of  the  government,  as  nearly  as  possible,  ...  in 
proportion  to  the  revenues  which  they  respectively 
enjoy  under  the  protection  of  the  State."  ^  But  here 
again  as  the  industrial  population  separated  from  the 
soil  and  a  large  body  of  citizens  arose,  who  had  no 

1  The  benefit  theory  has  been  illogically  developed  into  a  defence 
of  progressive  taxation.  See  Seligman,  Progressive  Taxation,  2d  ed. , 
p.  181  ff.     I  have  not  included  this  illogical  side  in  the  discussion. 

2  Bk.  V. ,  Chap.  II.,  Part  II.  On  the  various  interpretations  of 
this  passage,  see  Seligman,  op.  cit. ,  p.  150. 


142  INTRODUCTION   TO  PUBLIC  FINANCE    pari  ii 

land  and  little  personal  property,  and  who  could  ill 
afford  to  part  with  any  of  their  earnings,  humanity 
and  expediency  urged  the  exemption  of  the  mini- 
The  exemption  mum  of  subsistencc.  It  cost  too  much 
oft    mim-      ^^^  caused  too  much  bitterness  to  collect 

mum  of  sub- 
sistence, taxes   upon   those   having   only   the  bare 

necessities.  Then  came  Ricardo's  suggestion,  "  The 
power  of  paying  taxes  is  in  proportion  to  the  net, 
and  not  in  proportion  to  the  gross  revenue."  The 
items  that  were  to  be  deducted  were  the  costs  of 
production,  among  which  were  then  counted  the 
bread  and  meat  for  the  labourers,  which  were  re- 
garded very  much  as  so  much  fuel  shovelled  into  the 
furnace  of  a  human  machine.  Hence  it  was  argued 
that  it  would  be  too  burdensome  to  production  to 
tax  what  was  necessary  to  maintain  the  productive 
power  of  the  workers.  A  certain  amount  of  income, 
therefore,  should  be  exempt ;  for  if  taxed,  the  tax 
would  certainly  be  shifted.  Fortunately,  according 
to  the  prevalent  theory  of  wages,  the  amount  to  be 
exempted  would  remain  fixed,  or  nearly  so,  advanc- 
ing, if  at  all,  very  slowly.  So  that  all  incomes  over  a 
fixed  amount  were  to  be  taxed  proportionally,  since 
the  benefit  to  such  individuals  as  possessed  incomes 
above  the  chosen  minimum  was  supposed  to  be  in 
exact  proportion  to  the  amount  in  excess  of  the 
minimum.  Stated  broadly,  this  theory  was  as  fol- 
lows :  All  taxes  must  be  proportioned  to  benefit. 
Certain  classes  only  are  benefited,  namely,  those 
having  income  over  a  certain  amount ;  that  is,  over 


CHAP.  Ill  THE    TAX  SYSTEM  143 

the  minimum  of  subsistence.  They  should  be  taxed 
on  the  amount  above  that  minimum  of  subsistence. 
It  would  seem,  then,  that  the  money  spent  in  pro- 
tection of  the  workers  who  lived  on  the  minimum  of 
subsistence  was  to  be  treated  as  if  of  benefit  to  the 
other  classes.  This  puts  the  worker  in  much  the 
same  category  with  the  pauper  for  whom  the  State, 
from  reasons  of  humanity,  decides  that  it  is  worth 
while  to  care.  With  a  clearer  perception  of  the 
character  of  production  and  a  realisation  of  the  fact 
that  the  worker  was  a  man,  the  satisfaction  of  whose 
wants,  even  if  they  did  not  exceed  the  minimum  of 
subsistence,  was  yet  as  important  as  the  satisfaction 
of  the  higher  wants  of  other  classes,  came  a  realisation 
of  the  inadequacy  of  this  theory.  It  is  now  quite 
generally  abandoned,  except  as  the  legal  theory  in 
America. 

Perhaps  the  best  statement  of  the  United  States 
legal   theory   of   what  constitutes  the  just  measure 
of   taxation  is  given  by  Judge  Cooley.^  ^^^i^g^i 
"  If   it   were   practicable   to   do   so,  the  theory  in  the 

,       .     -    -  ,  ,  1  ,     United  States, 

taxes  levied  by  the  government  ought 
to  be  apportioned  among  the  people  according  to  the 
benefit  which  each  receives  from  the  protection  the 
government  affords  him ;  but  this  is  manifestly  im- 
possible. The  value  of  life,  liberty,  and  of  the  social 
and  family  rights  and  privileges  cannot  be  measured 
by  any  pecuniary  standard;  and  by  the  general 
consent  of  civilised  nations,  income  or  the  sources 
1  Taxation,  p.  24. 


144         INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

of  income  are  almost  universally  made  the  basis 
upon  which  the  ordinary  taxes  are  estimated.  This 
is  upon  the  assumption,  never  wholly  true  in  point 
of  fact,  but  sufficiently  near  the  truth  for  the  prac- 
tical operations  of  government,  that  the  benefit  re- 
ceived from  the  government  bears  some  proportion 
to  the  property  held,  or  the  revenue  enjoyed  under 
its  protection ;  and  though  this  can  never  be  arrived 
at  with  accuracy,  through  the  operation  of  any  gen- 
eral rule,  and  would  not  be  wholly  just  if  it  could 
be,  experience  has  given  us  no  better  standard,  and 
it  is  applied  in  a  great  variety  of  forms,  and  with 
more  or  less  approximation  to  justice  and  equality. 
But,  as  before  stated,  other  considerations  are  always 
admissible ;  what  is  aimed  at  is,  not  taxes  strictly 
just,  but  such  taxes  as  will  best  subserve  the  general 
welfare  of  political  society." 

Benefit  as  a  measure  of  taxation  is  therefore  ac- 
cording to  the  admission  of  one  of  its  strongest 
advocates  inadequate.  Only  in  special  instances  can 
benefit  be  directly  measured.  There,  of  course,  it 
has  been  and  will  remain  the  basis  of  taxation,  at 
least  until  the  State  shall  decide  that  the  special 
benefit  has  been  merged  in  the  common  benefit. 

•Sec.  3.  But  the  faculty  theory,  while  offering 
The  faculty  some  difficulties,  is  on  the  whole  more 
theory  iiius-      satisfactory.     The  faculty  theory  is  well 

tratedbythe  i  i  i       i  •  p 

English  poor  iHustratcd  by  the  history  of  the  English 
^^-  poor  law,  to  which  reference  has  already 

been  made.     At  first  the  attempt  was  made  to  supplv 


CHAP.  Ill  THE    TAX  SYSTEM  145 

the  wants  of  the  poor  by  voluntary  contributions. 
But  it  soon  became  apparent  that  all  were  not  con- 
tributing "  as  God  had  prospered  them."  The  idea 
that  the  support  of  the  poor  was  a  benefit  to  the 
other  classes,  except,  perhaps,  so  far  as  almsgiving 
was  supposed  to  insure  a  man's  salvation,  did  not 
appeal  to  the  legislators.  They  anxiously  avoided 
making  the  contribution  compulsory  because  it  would 
be  hard  to  justify  such  a  policy  by  pointing  to  any 
benefit.  But  they  felt  that  fairness  demanded  that 
each  should  contribute  according  to  his  ability. 
Indeed,  this  was  their  understanding  of  the  Divine 
command  upon  which  they  were  consciously  acting. 
The  justices  of  peace  were,  without  any  very  definite 
instructions  as  to  the  mode  of  procedure,  authorised 
to  see  that  each  person  contributed  fairly  according 
to  his  ability.  1 

What  then  constitutes  ability  ?     The  original  idea 
seems  to  have  been  that  the  possession  of  property 
constituted   ability.     But   the   value   of  Originaiidea 
property  depends  upon  its  power  to  yield  of  faculty. 
the  owner  a  revenue.     If  we  consider  landed  property 
only,  we  find  historically  the  greatest  uncertainty  as 
to  whether  men  should  be  assessed  according  to  some 
estimate   of   the   salable   value  or  according   to   its 
annual   yield.     This    uncertainty    arose  The  salable 
from  the  conditions  of  the  times.     The  ^^„^^ 
salable  value  of  landed  property  was,  of  produce. 
course,  determined  by  the  annual  produce  or  revenue- 
1  Ashley,  Economic  History,  II.,  p.  360. 


146  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

yielding  power.  In  the  middle  ages  land  was  not 
salable  property;  hence,  it  was  the  custom  to  value 
it  for  purposes  of  taxation  according  to  the  annual 
produce,  or  the  annual  rental  value,  which  was  de- 
termined by  the  produce.  The  history  of  taxation 
in  the  American  colonies  is  very  instructive  as  to 
the  method  of  determining  what  constitutes  faculty 
or  ability  to  pay.  Here  for  the  first  time  in  history, 
or  at  least  since  the  fall  of  Rome,  was  a  country  that 
enjoyed  almost  absolute  free  trade  in  land.  When 
the  Connecticut  proprietors  bought  in  fee  simple 
lands  in  Vermont,  which  they  had  never  seen,  to  be 
sold  again  on  the  same  terms  to  settlers,  whom  they 
had  never  seen,  often  for  prices  which  the  same  lands 
F  trad  '  would  uot  bring  to-day,  they  were  doing 
land  in  New  what  was  not  possiblc  in  any  European 
"^  "^  ■  country  at  the  time  and  what  is  only  partly 

possible  in  most  of  them  to-day,  i.e.  selling  land  as 
one  sells  wheat  or  any  other  commodity.  The  New 
P^ngland  colonists,  therefore,  had  the  choice  of  two 
methods  of  assessing  property  in  land :  they  could 
follow  the  older  method  to  which  they  were  accus- 
tomed at  home,  which  assessed  the  rental  value  of  the 
property,  or  they  could  take  some  method  suggested 
by  the  fact  that  lands  were  really  sold,  in  fee  simple, 
for  a  price.  In  general  they  chose  the  latter,  although 
there  are  numerous  traces  of  the  old  method  both  in 
the  tax  laws  and  in  other  regulations  that  are  of  a 
similar  character.  It  is  unfortunate  that  none  of  the 
investigations  into  the  history  of   this  period  have 


CHAP.  Ill  THE    TAX  SYSTEM  147 

been  specially  directed  toward  this  point.  Vermont 
furnishes  one  of  the  best  examples  of  the  principles 
underlying  the  colonial  ideas  of  taxation. ^  There 
the  conditions  were  very  simple.  Taxation  was  in- 
tended  to    cover   all   male   inhabitants.    ^ 

Taxation  of 

Every  male  between  16  and  60  years  of  facuitijin 
age,  with  a  few  definite  exceptions,  was  ^^^^<'"'' 
''rated"  at  X6  on  his  person^  That  is,  everybody 
was  considered  to  be  able  to  contribute  something, 
whether  he  had  property  or  not.  Then  the  different 
items  of  property  were  "  set  in  the  list "  over  against 
the  name  of  the  owner  at  fixed  rates.  For  example, 
each  acre  of  improved  land,  10s.  ;  an  ox  or  steer  four 
years  old,  X4  ;  three  years  old,  <£3  ;  two  years  old, 
X2;  one  year  old,  £1;  a  horse  three  years  old  or 
over,  £3;  all  "horse  kind"  two  years  old,  X2. 
Money  on  hand,  or  due,  was  listed  at  £6  in  the  XIOO. 
Then  all  persons  were  listed  "  for  their  faculty," 
according  to  occupation  and  earnings :  attorneys  at 
from  <£50  upwards,  as  the  value  of  their  practice  in- 
creased ;  all  tradesmen,  traders,  and  artificers  "  pro- 
portionally to  their  gains  and  returns."  Other  items 
of  property  were  entered  in  the  list  in  a  similar  way 
at  fixed  rates.  The  sum  total  of  all  the  different 
items  over  against  the  name  of  each  person  was  sup- 
posed to  represent  his  total  ability  or  faculty.  The 
notable  thing  about  all  this  is  that  only  revenue- 
yielding  property  was  listed.     It  was  not  a  property 

1  Wood,  History  of  Taxation  in   Vermont.    Columbia  College 
Studies,  IV.,  3. 


148  INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

tax  purely,  nor  an  income  tax.  But  the  thing  which 
it  sought  to  ascertain  was  how  much  ability  or  faculty 
each  person  had.  All  property  that  was  regarded 
as  indicative  of  faculty  was  listed,  and  many  other 
things  that  were  also  indicative  of  faculty  were  in«- 
eluded.  Later,  however,  Vermont  adopted  a  form 
more  nearly  in  accord  with  the  idea  that  property 
alone  indicates  faculty. 

There  are,  then,  two  ways  of  ascertaining  faculty. 
In  the  one  the  base  is  primarily  the  property  irre- 
Facvity  meas-  spcctivc  of  the  rcvcnue  the  property 
iired  by  prop-    yigi^jg,     Jq  the  Other  it  is  income  from 

erty  or  by 

income.  property  or  from  other  sources.     There 

are  also  two  ways  of  completing  the  measurement : 
We  may  assume  that  faculty  is  proportional  to 
property  or  income ;  that  is,  that  it  increases  in 
exactly  the  same  ratio  as  property  and  income 
increase.  Or  we  may  assume  that  it  increases  more 
rapidly  than  either  property  or  income.  The  choice 
of  base  and  the  choice  of  rate  have  given  rise  to 
long  and  weary  discussions  and  hair-splitting  dis- 
tinctions. In  regard  to  the  first,  it  is  sufficient  to 
say  that  at  present  the  most  widely  accepted  view 
is  that,  from  the  standpoint  of  abstract  justice, 
income  forms  a  better  starting-point  for  the  deter- 
Facuityin-  miuation  of  faculty  than  property.  But 
creases  more      ^g  cannot  avoid  cnterinp^  the  discussion  as 

rapidly  than 

property  or  to  whether  faculty  is  in  proportion  to  in- 
income.  comc    or   increases   more    rapidly.     The 

widespread  advance  of  democracy,  and  of  sympathy 


CHAP,  lit  THE    TAX  SYSTEM  149 

for  those  in  the  lower  walks  of  life,  led  to  the 
desire  to  justify  if  possible  the  exemption  of  smaller 
incomes,  especially  the  minimum  of  subsistence,  and 
this  desire  found  means  of  fulfilment  in  the  newer 
theories  of  value,  the  conception  of  marginal  utility, 
and  the  discussion  as  to  the  relative  urgency  of  differ- 
ent wants.  If  we  classify  certain  wants  as  absolute 
necessities,  then  the  conclusion  is  near  that  the 
possessor  of  the  minimum  of  subsistence  has  no 
ability  to  pay  taxes.  The  possessor  of  a  great  deal 
more  than  the  minimum  of  subsistence  can  in  pro- 
portion bear  more  taxes  than  one  who  has  only 
enough  to  obtain  a  few  comforts  in  addition  to  the 
necessities.  That  is,  the  test  of  justice  is  found  in 
equality  of  sacrifice,  and  we  impose  a  greater  sacri- 
fice if  we  take  away  from  the  labouring  man 
with  11500  a  year  10  per  cent  of  his  income 
than  we  impose  on  the  capitalist  with  $15,000 
annual  income  by  taxing  him  in  the  same  pro- 
portion. Moreover,  if  we  look  upon  faculty  as 
identical  with  general  economic  power,  then  it  is 
clear  that,  as  the  control  of  wealth  increases,  the 
ease  of  further  increase  is  greater.  Thus  it  is 
easier  relatively  for  the  millionaire  to  double  his 
fortune  than  it  is  for  the  daily  wage-earner  to 
rise  to  independence. 

Only  slightly  different  in  form  is  the  so-called 
"  leave-them-as-you-find-them  "  theory  of  justice  in 
taxation.  That  is,  that  taxes  should  be  so  imposed 
that  when  all  have  paid  them,  each  will  be  left  in 


150         INTRODUCTION  TO  PUBLIC  FINANCE    part  n 

the  same  position,  relative  to  his  fellows,  as  he  was 
before  the  payment. ^ 

Sec.  4.  There  are  two  other  theories,  which,  in- 
dependent of  the  idea  of  sacrifice  or  of  increased 
Thecompen-  economic  powcr,  attempt  to  justify  a 
satoryand        j^.   ,  ^^  ^^^^  ^^   taxation   for   higher   in- 

socialistic  *-'  c> 

theories.  comcs  than  for  lower.     These  two  the- 

ories adopt  the  hypothesis  that  the  common  benefit 
is  equal,  and  demand  that  the  inequalities  in  wealth 
should  be  removed  in  order  to  make  it  easily  possi- 
ble to  tax  according  to  this  equal  benefit.  There 
are,  first,  those  who  argue  that  the  inequalities  in 
wealth  are  due  in  large  measure  to  the  action  of  the 
State,  and  hence  the  State  is  justified  in  abandoning 
the  idea  of  equality  of  a  taxation  and  in  taxing  those 
who  have  much  wealth  more  heavily  than  others, 
for  they  have  gained  from  the  State's  own  action. 
This  has  been  called  the  compensatory  theory. 
Others,  again,  starting  from  the  same  hypothesis, 
urge  that  taxation  cannot  be  equal,  because  evil 
economic  forces  have  changed  the  abilities  of  the 
taxpayers  and  that  it  is  the  duty  of  the  State  to 
offset  these  forces  by  readjusting  wealth  through 
taxation.  This  has  been  called  the  socialistic  the- 
ory. Neither  of  these  theories  can  justly  be  called 
scientific ;  they  both  cut  loose  entirely  from  existing 
conditions. 

1  The  student  will  do  well  to  read  carefully  the  three  essays  by 
Edge  worth  on  the  "  Pure  Theory  of  Taxation  "  in  the  1897  volume 
of  the  Economic  Journal. 


CHAP.  Ill  THE    TAX  SYSTEM  \^\ 

We  cannot,  within  the  limits  of  this  work,  attempt 
an  exhaustive  criticism  of  all  the  different  theories 
as  to  justice  in  taxation.  But  the  conclusions 
reached  by  Selisfman  after  an  exhaustive   „  ,. 

,  oehgman's 

study  of  all  the  different  theories  are  too  conclusions  as 
important  to  be  omitted.^  He  finds  the  *^ P^^sression. 
benefit  tjieory,  like  the  socialistic  and  compensatory 
theories,  wholly  inadequate.  But  the  faculty  theory 
is  satisfactory  and  seems  to  him  to  justify  a  moderate 
progression.  Greater  faculty  is  represented  by 
the  higher  income  :  (1)  because,  after  the  initial  dis- 
advantages have  been  overcome,  it  is  easier  to  acquire 
more  ;  (2)  because  the  sacrifice  of  the  same  propor- 
tion of  the  larger  income  is  less  than  in  the  smaller 
income.  Neither  of  these  reasons  suggests  a  defi- 
nite rate  of  progression.  He  says :  "  If,  therefore, 
we  sum  up  the  whole  discussion,  we  see  that  while 
progressive  taxation  is  to  a  certain  extent  defensible 
as  an  ideal,  and  as  the  expression  of  the  theoretical 
demand  for  the  shaping  of  taxes  to  the  test  of 
individual  faculty,  it  is  a  matter  of  considerable 
difficulty  to  decide  how  far  or  in  what  manner 
the  principle  ought  to  be  actually  carried  out  in 
practice." 

It  would  seem,  then,  that,  in  general,  faculty  is  the 
ideal  base  of  taxation  ;  that  faculty  can  be  measured 
either  by  property  or  by  income,  but  best  by  the  lat- 
ter; that  faculty  increases  somewhat  progressively 
and  is  affected  by  the  consideration  of  relative  con- 
1  Progressive  Taxation,  2d  ed.,  p.  302  ff. 


152  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

ditions,  as  the  kind  of  property,  the  source  of  the 
income,  or  the  burdens  already  resting  upon  the 
Modif  in  individual  or  property.  All  these  consid- 
reiative  con-  crations  havc  to  be  applied  in  determining 
*°^*'  whether  the  tax  system  of  any  country 

complies   with   the   rules   of  justice.     They  do  not 
apply  with  the  same  strictness  to  the  separate  taxes. ^ 

1  The  recognition  of  the  principle  of  progression  in  the  recent 
reforms  of  taxation  is  very  marked.     See  Seligman,  Essays,  305  ff . 


CHAPTER  IV 

THE   DEVELOPMENT   OF   TAXATION   BEFORE  THE 
INDUSTRIAL   REVOLUTION 

Section  1.  Feudalism  placed  a  large  number  of 
economic  receipts  directly  in  the  hands  of  the  rulers. 
These  receipts  were  generally  sufficient  ^ 

,  ^  -^  Taxes  not 

tor  the  discharge  of  the  customary  pub-  found  under 
lie  activities.     It  is  a  mistake,  therefore,  •^"^"'^«^*«^- 
to  search  for   taxes  proper  in   the   period  of  the  su- 
premacy of  feudalism  ;  that  is,  from  the  capitulary 
of  Charles  the  Bald,  877,  to  the  end  of  the  thirteenth 
century.     Taxes  begin  to  emerge  with  the  transfor- 
mation of  feudal  rights  and  dues,  the  commutation 
of  obligatory  military  services,  and  the  like  into  pay- 
ments in   kind   or   in   money.     Greek   and   Roman 
forms  of  taxation  had  even  less  influence  on  modern 
systems  of  taxation  than  Greek  and  Roman  forms  of 
expenditure  on  modern  spending.     For  the  study  of 
Roman  law  and  the   traditions  of  the  glory  of  the 
Roman   Empire   determined   many    State   activities 
that  involved  the  spending  of  public  wealth.     But 
new  methods  of  obtaining  the  funds  were  devised. 
Information  concerning  the  taxes  of  the  period  from 
the  fall  of  Rome  to  the  capitulary  of  Charles  the  Bald 
is  rather  meagre  and  too  vague  to  be  of  much  value. 

163 


154  INTRODUCTION   TO   PUBIIC  FINANCE    part  ii 

The  first  taxes  to  emerge  from  the  darkness  of 
this  period  are  a  number  of  fee-like  contributions  of 
Early  taxes  the  nature  of  commuted  feudal  services, 
were  com-         ^^  directlv  Connected  with  feudal  rig^hts, 

mvied  jeudal  ^  °         ' 

dues.  certain  market  dues  and  customs  duties, 

tolls  for  protection  to  travellers,  for  the  use  of  roads, 
bridges,  and  ferries,  and  two  forms  of  property  taxes, 
land  taxes  and  family  taxes.  The  land  taxes  of  this 
period  are  just  emerging  from  the  character  of  rent 
payments  and  acquire  only  by  degrees  the  character- 
istics of  pure  taxes.  Even  in  the  case  of  land  left  to 
the  original  possessors  after  conquest,  the  payments 
demanded  are  more  of  the  character  of  rents  than  of 
taxes.  But  the  combination  of  these  charges  with 
hearth  or  family  taxes  leads  to  the  formation  of  a 
sort  of  mixed  property  and  personal  taxes.  The  fact 
that  land  is  practically  the  only  kind  of  revenue- 
yielding  property  and  that  no  considerable  earnings 
are  made  without  the  use  of  land  makes  this  tax  suf- 
ficiently universal  for  the  demands  of  justice. 

Direct  taxes  are  in  this  period,  as  in  classical  times, 
never  paid  by  the  freeman.  They  are  regarded  as 
The  free-man  derogatory  and  as  the  badge  of  a  servile 
exempt.  position.     The   freeman  could   give   his 

services  to  the  State,  he  could  risk  his  life  for  it,  but 
he  would  regard  it  as  a  deadly  insult  if  he  were 
asked  to  pay  taxes.  Indirectly,  of  course,  he  was 
taxed,  as,  for  example,  when  he  bought  merchandise, 
for  permission  to  sell  which  the  trader  was  taxed. 

As  soon,  however,  as  industry  began  to  develop, 


CHAP.  IV     THE   DEVELOPMENT   OF   TAXATION  155 

as  soon  as  the  crafts  sprang  up  in  the  cities  which 
clustered  around  the  market-places,  and  classes  which 
had  lived  in  part  from  industrial  pursuits  found  it 
possible  to  obtain  so  wide  a  market  that  they  could 
live  entirely  from  their  industry,  then,  there  arose 
such  a  differentiation  of  the  sources  of  wealth  that 
the  old  forms  of  taxation  were  insufficient.  Tax- 
ation had,  therefore,  to  be  extended  to  Taxationex- 
meet  the  new  forms  of  wealth.     The  first  ^^""^^^  ^"^  "^'^ 

new  forms  of 

methods  of  taxing  these  were  dictated  wealth. 
solely  by  expediency  and  the  desire  of  obtaining  as 
large  revenues  as  possible,  rather  than  by  any  defi- 
nite ideas  of  justice,  and  were  mainly  indirect  in 
character  and  partly  an  extension  of  the  older  market 
dues,  excises,  customs,  and  tolls,  together  with  new- 
taxes  of  the  same  kind. 

Of  old  Roman  taxes  none  can  be  strictly  said  to 
have  survived  the  conquest.     Some  lasted  through- 
out  the    Merovingian   period  in  a  greatly  changed 
form.     Finally  they  were  merged  into  various  feudal 
payments,  and  took  on  the  nature  of  rents.     A  few 
relatively  insignificant  market  dues  and  fees  constitute 
the  only  taxes  which  regularly  formed  a  part  of  the 
revenues  of  the  State  or  of  the  State's  officers,  the  feu- 
dal lords.  The  regular  feudal  burdens,  while  economic 
in  character  and  not  fiscal,  really  fill  the  Feudal  dues 
place  of  the  later  direct  taxes.     In  propor-  ^sheavy^^ 
tion  to  the  prosperity  of  the  people  they  taxes. 
were  certainly  as  heavy  as  any  modern  systems  of 
taxes.       The    rapid    disintegration   of   the    German 


156         INTRODUCTION   TO  PUBLIC  FINANCE    part  it 

Empire  into  smaller  territorial  lordships  after  the 
sixteenth  and  seventeenth  centuries  rendered  the 
question  of  imperial  taxation  at  once  less  pressing 
and  more  complicated.  On  some  eleven  different 
occasions,  according  to  Wagner,  between  1427  and 
1550  the  Empire  as  such  stood  in  need  of  extra  rev- 
enues, for  purposes  so  clearly  of  common  benefit  as  to 
The" common  justify  a  demand  for  common  contribu- 
penny."  tious.    Such  an  instance  is  that  of  the  Hus- 

site and  Turkish  wars.  The  tax  used  was  the  "  com- 
mon penny."  This  direct  imperial  tax  was  a  mixture 
of  poll  and  personal  taxes  with  income  and  property 
taxes.  We  find  very  similar  taxes  in  France  and 
England.  It  fell  upon  all  imperial  subjects  whether 
holding  from  the  crown  or  not,  provided  they  held 
property.  The  rate  was  an  irregular  regressive  one, 
being  smaller  for  all  above  a  certain  amount  of 
property.  It  was  very  badly  administered  and  not 
universally  collected.^ 

In  the  German  principalities  that  were  formed  out 

of  the  German  Empire   the   first  direct   taxes    were 

the  bedes.     These  were  extra  payments, 

The  "  bedes "  j.    ./  ' 

similar  in  form  to  the  existing  feudal 
contributions.  They  were  made  by  those  already 
paying  such  dues  and  were  measured  in  somewhat 
similar  ways.  The  basis  was  generally  landed  prop- 
erty. The  first  bedes  were  more  or  less  voluntary,  pri- 
vate contributions  for  the  support  of  the  Vggt,  count, 
or  lord  for  some  recognised  public  purpose.  By  con- 
1  Cf.  Wagner,  Schonberg's  Handbuch,  3d  ed.,  III.,  184. 


CHAP.  IV     THE  DEVELOPMENT  OF  TAXATION  157 

tracts  entered  into  between  the  contributors  and  the 
lords,  they  became  compulsory  and  formed  part  of  the 
regular  income  of  the  lords,  who  then  in  extraor- 
dinary cases  of  need  would  again  come  forward  with 
the  demand  for  extra  or  "  necessity  "  hede%.  This  was 
frequently  done  in  times  of  war.  Hence,  these  lede% 
were  often  called  "army  hedes.'"  Some  of  these  in  turn 
became  customary  or  fixed.  With  the* rise  of  the  idea 
of  public  life  and  public  needs,  the  hedes  easily  be- 
came compulsory  public  contributions,  and  were  re- 
garded as  distinct  from  the  feudal  dues,  which  by 
virtue  of  longer  standing  and  the  absence  of  a  recog- 
nised public  purpose  were  treated  as  the  private  rev- 
enues of  the  prince.  A  peculiarity  of  the  earlier  as- 
sessments of  the  hedes  was  the  method  of  apportion- 
ment to,  or  assumption  by,  the  different  orders  or 
cities  of  a  certain  lump  sum,  which  was  then  distrib- 
uted by  their  own  rulers  among  the  different  mem- 
bers, according  to  some  measure  agreed  "Donative 
upon.  Prela.:3s,  clergy,  and  knights  were  monies." 
exempt  from  the  ordinary  hedes.  They  sometimes 
rendered  similar  contributions,  hedging  themselves 
in  with  all  sorts  of  reserves  and  precautions,  to  pre- 
vent the  payments  becoming  regular.  These  were 
called  "  donative  monies." 

It  was  in  the  cities  that  retained  a  large  degree  of 
political  independence  that  the  highest  development 
of  the  fiscal  system  was  to  be  found  in  the  middle 
ages.  This  is  owing  to  the  fact  that  they  were  in  ad- 
vance of  the  rest  of  the  country  in  their  economic  de- 


158  INTRODUCTION    TO   PUBLIC  FINANCE    part  ii 

velopment.  Long  before  the  principalities  were  able 
„.\  J     ,        to  abandon  payments   in  kind  and  ser- 

Hxgh  develop-  *■    '' 

mentofcUy  vices,  the  cities  were  collecting  taxes  in 
finances.  money,  making  some  use  of  public  credit 

and  developing  regular  fiscal  offices.  "  The  art  of 
taxation,"  says  Wagner,^  "  the' use  of  public  credit,  and 
the  practical  organisation  of  the  financial  administra- 
tion in  the  cities  had  been  an  important  part  of 
public  institutions  for  centuries  before  the  territo- 
rial State  had  even  recognised  the  need  of  such." 
This  field  has,  however,  not  yet  received  the  atten- 
tion of  historical  investigators  sufficiently  to  allow 
us  to  draw  conclusions  as  to  the  generally  prevailing 
forms.  ^  ^f^ 

Sec.  2.  In  France  the  early  growth  of  a  strong 
central  power  led  to  an  intensification  and  sharp 
differentiation  of  the  royal  feudal  dues  from  the 
other  feudal  charges,  which  gives  them  something 
Royal  feudal  ^^^  character  of  taxes.  But  inasmuch 
dues  in  ^s  the    French   State   was   peculiarly   a 

France  not  •  o,  i      i 

properly  proprietary  State,  and  the  territory  was 

taxes.  rather  a  part  of  the  private  property  of 

the  king  than  public  property  in  the  modern  sense, 
these  early  charges  are  not  taxes  proper,  but  rents, 
or,  to  use  the  more  general  term,  feudal  dues.  But 
the  rapid  growth  of  the  central  power,  and  the  high 
development  of  public  needs  in  the  kingdom,  neces- 
sitated more   revenues.      These  needs  were  at  first 

1  Schonberg's  Handhuch^  3d  ed. ,  III . ,  185. 

2  See  Schonberg's  Investigations  into  the  City  of  Basel. 


CHAP.  IV     THE  DEVELOPMENT   OF  TAXATION  159 

met  by  the  collection  of  indirect  consumption  and 
trade  taxes.  The  tendenc}^  toward  the  development 
of  indirect  taxes  grew  apace  after  the  seventeenth 
century.  The  mercantile  theory,  which  was  su- 
preme for  most  of  the  time  after  Colbert,  prompted  a 
high  development  of  custom  duties,  and  these  ran 
parallel  with  internal  consumption  taxes.  In  the 
eighteenth  century  there  were  three,  or  possibly 
four,  important  taxes  which  had  grown  up  in  vari- 
ous ways  out  of  the  feudal  dues.  These  were  the 
"•tailW'^  (taHage),  the  "  vm^^zVmes "  (twentieths), 
the  "  capitation  "  (poll),  and  possibly  the  *^  dimes  " 
(tithes). 2 

The  taille  is  of  feudal  origin.  Originally  it  was 
arbitrarily  assessed  with  extreme  rigour  upon  the 
serfs  by  the  lords,  and  occasionally  upon  the  great 
vassals  by  the  king  with  the  assent  of  the  peers.  It 
became  a  permanent  charge  when  royal  power  was 
firmly  established  on  the  ruins  of  f  uedalism.  Charles 
VIII,  made  it  permanent  at  the  same  time  with  the 

1  The  term  "  taille,''''  in  English,  tallage,  also  spelled  talliage,  tail- 
age,  and  taillage,  is  from  a  root  meaning  "  to  cut."  It  is  explained  as 
derived  from  the  general  method  of  keeping  accounts  by  means  of 
notched  sticks.  A  taille  was  any  sum  of  which  account  was  kept, 
then  the  amount  scored  up  (tallied)  against  any  person.  Slender 
sticks  with  notches  called  "  tally-sticks"  were  used  by  the  English 
exchequer  for  accounts,  until  abolished  by  the  statute  of  23  Geo. 
III.,  c.  82.  Similarly,  the  German  Kerbe,  tally  sticks.  Other 
roots  meaning  "  to  cut "  are  common  in  the  names  of  various  taxes  ; 
viz.  incisio,  incisiira;  cise,  later  accise,  adcisio,  Eng.  excise  ;  in 
these  Latin  roots  the  thought  is,  that  a  part  of  the  taxed  article  is 
cut  out  for  the  government. 
'-^  See  Vignes,  Ed.,  Traite  des  Impots  en  France,  1872,  p.  10. 


160         INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

establishment   of  the  royal   army.      The   taille  was 
both  real  and  personal.     On  the  one  side 

The  taille.  .  i  i  i  pit-, 

it  was  based  on  the  revenue  from  landed 
property  ;  on  the  other,  it  was  based  on  the  faculty 
of  the  taxpayer,  measured  by  the  revenues  from  his 
landed  property,  and  active  rents,  as  well  as  the  prod- 
ucts of  his  own  industry.  This  tax,  suppressed  in 
1790,  yielded  44,737,800  livres  the  year  before. 
Necker  obtained  91,000,000  livres  from  it.  Nobles 
and  clergy  were  exempt. 

The  vingtiimes  consisted  of  one  or  more  twentieth 
parts  of  the  revenues  from  either  landed  or  movable 
property.  This  tax  had  a  varied  history.  At  first 
it  was  used  with  the  taille^  but  when  that  tax  was 
The  ving-  made  permanent  under  Charles  VIII., 
ti^mes.  ^\^Q  vingtieme   disappeared.     It  was   re- 

vived in  1710  by  Louis  XIV.  as  a  war  tax.  It 
remained  as  the  occasional  resource  of  the  treasury 
up  to  the  Revolution.  Only  the  clergy  were  ex- 
empt. It  produced  46,000,000  livres  (under  Necker, 
55,000,000). 

The  capitation^  or  system  of  poll  taxes,  was  the 
variable  tax  of  the  ancient  monarchy.  It  dates 
The  capita^  from  1695.  It  was  first  regarded  as  a 
^^^'^-  temporary  expedient,  but  was  continued 

to  the  Revolution.  It  was  assessed  according  to  a 
tariff  of  twenty-two  classes.  But  the  base  was  fre- 
quently changed.  The  clergy  were  exempt,  the 
nobles  were  taxed  on  the  basis  of  their  presump- 
tive  ability,   and   those   who   paid   the   taille   were 


CHAP.  IV      THE  DEVELOPMENT   OF  TAXATION  161 

taxed  according  to  the  amount  of  that  tax  they  paid. 
In  1786  it  yielded  41,500,000  livres.i 

The  dime,  or  tithe,  was  an  assessment  paid  in  kind 
from  the  fruits  of  the  soil  for  the  benefit  of  the 
clergy.  The  tax  was  not  always  the 
tenth,  but  varied  from  one-seventh  to  '^^^^^'^^^ 
one  thirty-second.  The  ecclesiastical  purpose  of 
this  payment  has  led  some  to  refuse  to  call  it  a  tax 
in  the  strict  sense.  Since  the  Church  exercised  a 
power  that  differed  little  from  that  of  the  State  and 
the  burden  was  a  regular  one  maintained  for  a  public 
purpose,  it  should  probably  be  called  a  tax. 

The  corvSes  were  more  strictly  taxes  than  the 
dimes.  These  were  personal  services  applied  to  the 
construction  of  the  roads  and  other  pub- 
lie  works.  They  were  regarded  as  feu- 
dal dues.  They  were  of  two  kinds :  the  first  were 
levied  on  property  and  rendered  by  the  proprietor 
for  his  lands,  and  the  second  were  levied  on  persons 
and  rendered  by  all,  irrespective  of  land-holding. 
The  nobles  and  the  aliens  were  not  subject  to  the 
personal  corvees.  The  clergy  could  commute  them 
into  money  payments  or  have  them  rendered  at  their 
own  cost.  The  land  corvSes  were  due  from  all 
hereditary  proprietors  irrespective  of  rank,  but  they 
were  not  bound  to  furnish  them  in  person.  Louis 
XVI.  suppressed  the  corvSes  in  1776,  but  they  were 
reestablished.     They  disappeared  in  1793. 

The  most   important  indirect  consumption   taxes 

1  For  further  details  see  Parieu,  Traite  de  Impots,  I.,  p.  144  ff. 


162  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

were  leased  for  166,000,000  livres,  and  those  collected 
by    the     orovernment    were     51,500,000 

Indirect  con-         ^  " 

sumption  livrcs.  Thcsc  together  nearly  equalled 
taxes.  ^YiQ  revenue  from  direct  taxes.     The  in- 

direct taxes  of  the  ancient  monarchy  were  :  first,  the 
aides^  which  consisted  of  taxes  on  drinks,  on  articles 
of  gold  and  silver,  on  iron,  oil,  skins,  starch,  bills, 
paper,  etc.,  and  the  octrois^  levied  at  the  city  gates 
on  all  sorts  of  goods  when  brought  into  the  towns ; 
second,  the  gahelle^  or  salt  tax,  which  was  so  ar- 
ranged as  to  amount  practically  to  a  direct  tax. 
For  the  people  were  obliged  to  buy  each  year  from 
the  management  of  the  monopoly  an  amount  of  salt 
determined  in  each  case  by  the  size  of  the  family. 
There  was  a  similar  "salt  conscription  "  in  Germany. 
Thirdly,  there  was  the  tax  on  tobacco. 

Sec.  3.  In  England  ^  we  find  in  Anglo-Saxon 
times  three  principal  taxes  :  (1)  The  ship-geld,  or 
Early  English  sliip  moucy,  a  tax  imposcd  on  those 
taxes.  shires   and   towns    along    the    sea-coast 

which  were  unable  at  time  of  need  to  furnish  sliips 
for  defence,  when  invasion  was  threatened.  It  was 
levied  intermittently  and  was  used  exclusively  for 
naval  purposes.  The  attempt  of  Charles  I.,  in  1637, 
to  impose  this  tax  on  all  of  England  and  for  pur- 
poses other  than  the  navy,  was  one  of  the  contribut- 
ing causes  of  the  civil  war.  (2)  The  tribute-like 
"  Danegeld"  was  levied  after  991  at  so  much  a  hide 
(piece  of  land)  and  paid  to  the  Danes  to  prevent 
1  See  Dowell,  History  of  Taxation  and  Taxes  in  England. 


CHAP.  IV      THE  DEVELOPMENT   OF   TAXATION  163 

them  from  raiding  the  coasts.  After  the  cessation 
of  the  original  cause,  it  was  collected  by  the  kings 
as  private  revenue.  (3)  The  "  fumage,"  or  "  tax  of 
smoke  farthings,"  was  a  tax  on  every  hearth.  This 
seems  to  have  been  a  traditional  form  of  tax  with 
the  Saxons.  It  was  in  effect  a  family  tax,  as  the 
hearth  stood  for  the  family. 

In  Norman  times,  the  feudal  character  of  the  gov- 
ernment was  such  that  it  obtained  revenues  from 
the  demesne,  from  feudal  dues,  and  from  the  royal 
prerogatives  so  great  that  no  real  taxes  exist.  The 
Danegeld  was  levied  by  the  Conqueror  as  an  annual 
tax,  but  disappeared  after  1163. 

With  the  reign  of  Henry  II.  came  a  more  ordered 
and  regular  system  of  taxation.  This  began  with 
the  well-known  commutation  of  the  mill-  ^ 

Commutatxon 

tary  obligations  of  tenants.  It  was  due  'ofmiiUary 
to  the  continental  position  of  the  Ange-  ^^^^^^^• 
vin  kings.  The  distance  at  which  war  was  waged 
and  the  length  of  service  demanded  rendered  the 
military  obligations  particularly  burdensome,  and 
tenants  were  anxious  to  commute  them.  An  army 
of  mercenaries,  too,  suited  the  king  better,  as  easier 
to  control  than  the  feudal  army.  Hence  arose  the 
commutation  of  the  duty  to  foreign  service  into  a 
money  payment  of  two  marks,  £\  6*.  M.^  on  each 
fee  of  £20,  known  as  the  ''  scutage,"  or  shield-money. 
Henry  II.  collected  three  such scutages,  and  this  tax  did 
not  fall  into  disuse  until  after  1322.  It  was  practi- 
caJly  a  land  tax,  levied  each  time  for  a  special  purpose. 


164  INTRODUCTION   TO  PUBIIC  FINANCE    part  v 

The  tallage  in  England  was  the  tax  that  was  coL 
lected  from  the  tenants  on   the   royal   demesne    on 
occasions    of    unusual    expense.     Those 
who  paid  the  hidage  or  Danegeld  were 
generally  exempt.     Cities  and  towns  not  exempt  in 
this  way  paid   the   auxilium   or   aid.     The   tenants 
were  liable  for  these  taxes  up  to  one-tenth  of  their 
goods.      In   the   city   of    London   the   tallage   was 
treated   as   a   "benevolence."      It   was    superseded 
after  Edward  III.  by  the  general  taxes  on  movables. 
The  taxes  on  movables  began  with  the  "  Saladin 
tithe  "  in  1188. ^     It  was  one-tenth  of  rent  and  mov- 
ables paid  by  all  except  crusaders.     Out 

The  hegtnmng  x  ^ 

of  taxes  on  of  this  insignificant  beginning  grew  a 
movables.  system  of  taxcs  on  movables  which  finally 
included  all  the  taxes  so  far  mentioned.  Richard  I. 
levied  a  tax  on  all  ploughed  land  in  1194,  known  as 
the  "  carucage,"  from  the  area  upon  which  it  was 
levied  ;  namely,  the  amount  of  land  that  could  be 
covered  by  one  plough  (caruca)  in  a  season.  After 
1224,  this  was  merged  in  the  tax  on  movables. 

The  tax  on  rents  and  movables,  which  began,  as  just 
^,   ,,,,.        ■  stated,  with  the  Saladin  tithe,  was  contin- 

The  "  thvr-  '  ' 

teenihs  and  ucd  from  1189  to  1334.  This  was  a  grant 
fifteenths."  ^^  one-thirteenth  in  1207,  one-fifteenth 
in  1225,  one-fortieth  in  1232,  one-thirtieth  in   1237, 

1  The  tithe,  or  tenth,  as  the  rate  of  taxation  appears  in  many 
taxes  in  Christian  countries.  It  is  especially  common  in  Catholic 
countries.  The  idea  of  taking  a  tenth  has  its  origin  in  Mosaic  law  : 
*'  And  concerning  the  tithe  of  the  herd,  or  of  the  flock,  even  of  what- 


V 
CHAP.  IV     THE  DEVELOPMENT   OF  TAXATION  165 

one-fifteenth  in  1275.  Up  to  1283,  the  method  of 
obtaining  the  grant  was  by  separate  negotiations 
with  each  section  of  the  country.  But  after  that 
date,  general  grants  were  made  by  Parliament  and 
other  taxes  were  discontinued. 

Besides  these  direct  taxes,  the  crown  had  the 
privilege  of  taking  "customary"  tolls  upon  merchan- 
dise imported  or  exported.  Hence  our  customs 
modern  term,  "  customs  duties."  These  duties. 
tolls  were  of  the  character  of  licenses  and  protec- 
tion money.  Their  early  history  is  obscure.  Be- 
fore the  Magna  Charta  they  had  become  so  fixed 
and  regular  as  to  call  forth  the  well-known  clause 
of  that  historical  document :  "  Let  all  merchants 
have  safety  and  security  to  go  out  of  England,  to 
come  into  England,  and  to  remain  in  and  go  about 
through  England,  as  well  by  land  as  by  water,  for 
the  purpose  of  buying  and  selling,  without  the  pay- 
ment of  any  evil  or  unjust  tolls,  on  the  payment  of 
the  ancient  and  just  customs "  {%ine  omnibus  malis 
toltis,  per  antiquas  et  reetas  consuetudines) .  In 
1275  these  "  ancient  customs,"  slightly  raised,  were 
granted  Edward  I.  by  Parliament.  The  chief  duties 
were  on  wine  imported  and  wool  exported  and  a 
poundage  on  all  other  imported  goods  or  exported. 

From  1334  to  1453  there  are  a  number  of  changes 
to  note.     The    fifteenths    and   tenths    were    appor- 

soever  passeth  under  the  rod,  the  tenth  shall  be  holy  unto  the  Lord." 
Lev.  28  :  32.  A  half  a  tithe  and  other  convenient  fractions  give 
rise  to  the  rates,  which  otherwise  appear  irregular. 


166  INTRODUCTION   TO  PUBLIC  FINANCE    part  n 

tioned  among  the  communities,  cities,  and  boroughs, 
^.   »^^  the  townships  and  the  demesne  tenants, 

The    fif- 
teenths and       in   1334,  and  the  assessment  then  made 

tenths."  remained    the    basis    of    taxation.     The 

tax  thus  became  a  fixed  charge.  It  varied  in 
rate  from  one-half  a  fifteenth  and  tenth,  to  two-fif- 
teenths and  tenths,  as  the  need  for  revenues  chai^ged. 
Sometimes  no  such  grant  was  made.  In  1377  Parlia- 
ment granted  to  the  king  a  tax  of  "  four  pence,  to  be 
taken  from  the  goods  of  each  person  in  the  kingdom, 
The  "tallage  men  and  women,  over  the  age  of  fourteen 
of  groats."  years,  except  only  real  beggars."  This 
was  known  as  the  "  tallage  of  groats."  Subsequently 
a  classified  poll  tax  was  employed,  in  which  an  at- 
tempt was  made,  by  the  arrangement  of  the  payers 
into  classes  and  a  gradation  of  the  rates,  to  get  a 
larger  return  by  taking  advantage  of  the  greater 
wealth  of  certain  classes.  The  rates  were :  for  the 
Duke  of  Lancaster,  who  was  the  highest  subject, 
£6.  138.  4:d.  ;  earls  X4,  barons  <£2,  and  so  on  down 
to  the  lowest ;  every  one,  except  beggars,  was  to  pay 
at  least  a  groat  or  Ad.  In  1379  this  yielded  X 25,000, 
which  was  only  slightly  more  than  the  previous  tallage 
of  groats.  The  clergy  were  included  in  both  these 
taxes.  After  the  peasant  revolt,  which  was  occasioned 
partly  by  the  oppressive  methods  used  in  collecting 
these  taxes,  return  was  made  to  the  fifteenths  and 
tenths.  From  1382  the  landowners  take  the  whole 
burden  of  the  old  "  fifteenth  and  tenth."  In  1435 
this  was  supplemented   by  a   graduated  tax  on  in- 


CHAP.  IV     THE  DEVELOPMENT   OF   TAXATION  161 

come  from  lands,  rents,  and  annuities,  and  offices  of 
freehold.  In  the  reign  of  Edward  III.  the  customs 
yielded  large  returns.  They  consisted  as  before  of 
tunnage  on  wine,  customs  on  wool  and  leather,  and 
poundage  on  all  other  merchandise.  The  popu- 
larity of  Edward  IV.  enabled  him  to  add  to  his  other 
sources  of  revenue  the  "  benevolences,"  demands 
on  the  rich  for  special  contributions.  ^^Benevo- 
These  "  benevolences "  were  not  always  ^«^es." 
cheerfully  paid.  It  was  more  often  "  as  though," 
says  More,  *'  the  name  of  benevolence  had  signified 
that  every  man  should  pay  not  what  he  himself  of 
his  good  will  list  to  grant,  but  what  the  King  of  his 
good  will  list  to  take."  Throughout  the  history  of 
taxation  in  England  the  grant  of  monopolies  of  new 
industries  was  made  a  source  of  income  to  the  govern- 
ment. The  multiplication  of  these  under  Elizabeth 
did  not  yield  much  revenue,  although  it  gave  rise  to 
much  discontent. 

There  is  little  in  the   varied  application  of  these 
taxes  that  is  important  as  showing  the  line  of  de- 
velopment until  the  seventeenth  century.     At  that 
time  they  proved  unequal  to  the  task  of  meeting  the 
growing  needs  of  the  treasury.     The  chief  auxiliary 
lay  in  the    extension  of    the    indirect  consumption 
taxes.     The  year  1692  (revision,  1697)  saw  the  estab- 
lishment of  a  permanent  land  tax.     This  j^j^  perma- 
grew  out  of  the  apportionment  of  the  "fif-  nent  land 
teenths  and  tenths."     It  became  a  fixed 
charge   on  land,  a  real  burden,  not  having,  as  time 


168         INTRODUCTION  TO  PUBLIC  FINANCE    part  il 

went  on,  any  definite  relation  to  the  income  from 
land.  In  1798  Pitt  made  this  redeemable  by  the 
payment  of  a  lump  sum  down,  after  which  no  annual 
tax  would  be  collected.  This  privilege  has  been 
taken  advantage  of  to  the  extent  of  removing  half 
the  charge  from  the  lands.  In  its  operation  the  land 
tax  became  rather  a  rent  than  a  tax. 

The  wars  of  the  period  of  the  French  Revolution 
and  the  consequent  need  of  revenue  introduced  the 
The  income  general  income  tax  (1798,  1802,  1803, 
^^^-  1806).     This  tax  was   no   departure  in 

principle  from  the  older  taxes,  although  a  departure 
in  method.  It  has  been  well  characterised  as  a  com- 
bination of  several  taxes  into  a  system  which  has  for 
its  aim  the  proportional  taxation  of  all  incomes,  with 
the  exemption  of  a  certain  fixed  sum  (degressive). 
The  form  which  it  took  in  1803  is  the  best  to  study. 
Two  separate  acts  were  passed,  the  one  taxing  all 
incomes  from  holdings  of  real  estate,  rents,  and  pub- 
lic salaries  at  the  source ;  that  is,  so  far  as  possible 
the  tax  was  deducted  before  the  revenues  passed 
into  the  hands  of  the  recipient.  The  second  taxed 
industrial  earnings  and  interest  on  capital  on  the 
basis  of  a  declaration  by  the  taxpayer.  The  tax 
began  with  an  income  of  <£60  (later  <£50),  and  this 
amount  could  be  deducted  from  all  incomes  below 
X150  ;  after  that  the  full  rate  was  paid.  Each  per- 
son was  required  to  declare  his  whole  income  and 
could  claim  reimbursement  for  any  tax  stopped  at 
the  source  if  he  could  show  that  his  total  income 


1 


CHAP.  IV     THE  DEVELOPMENT  OF  TAXATION  169 

was  below  the  minimum.  This  tax,  set  aside  in 
1816,  was  restored  in  1842,  as  a  substitute  for  the 
indirect  taxes,  removed  in  consequence  of  the  de- 
mand for  commercial  freedom.  The  rate  is  changed 
from  time  to  time  as  the  needs  of  the  government 
change. 

Sec.  4.  Local  taxation  in  England  has  been 
partly  independent  of  royal  taxation.  England 
has  not  followed  the  continental  plan  of  collecting 
revenues  for  local  purposes  in  the  form  of  additions 
to  the  national  taxes.  While  the  weight  The  poor  rate 
of  national   taxation   fell  upon  customs  ^^fP^-^^^^yP' 

^  of  local  taxes 

duties,  excises,  and  certain  direct  taxes,  in  England. 
measured  roughly  by  income,  local  taxation  was 
based  exclusively  upon  revenues  from  real  estate. 
The  prototype  of  all  local  taxation  was  the  poor 
rate.  Previous  to  the  reign  of  Elizabeth  local  ac- 
tivities were  of  such  a  character  that  they  could 
be  discharged  from  feudal  dues.  In  the  manorial 
villages  and  the  boroughs  with  semi-feudal  guild, 
and  close  corporation  governments,  which  owned 
landed  property,  feudal  incomes  paid  the  few  public 
expenses.  But  the  removal  of  the  monasteries,  hos- 
pitals, and  other  charitable  foundations,  threw  upon 
public  charity  a  number  of  well-developed  paupers ; 
and  the  rapidly  changing  character  of  industry  and 
of  economic  life  constantly  gave  rise  to  the  problem 
of  what  to  do  with  the  unemployed,  who  at  times 
became  very  numerous.  The  result  was  the  famous 
poor  law  of  1601.     The  principle  of  the  tax  for  the 


170  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

support  of  the  poor  had  been  of  slow  growth.  In 
the  reign  of  Henry  VIII.  the  giving  of  alms  was 
prohibited,  and  collections  for  the  impotent  poor  of 
the  parish  were  required  to  be  made  in  each  church. 
In  1547  the  Bishops  were  authorised  to  prosecute 
all  persons  who  refused  to  contribute  for  this  pur- 
pose, or  should  dissuade  others  from  contributing. 
In  the  fifth  year  of  Elizabeth  the  justices  of  peace 
were  made  judges  of  what  constituted  a  reasonable 
contribution  for  this  purpose.  After  1572  regular 
compulsory  contributions  were  levied.  Out  of  a 
purely  voluntary  contribution,  then,  there  emerged 
in  two-thirds  of  a  century  a  compulsory  tax.  The 
basis  of  this  tax  was  the  annual  rental  value  of 
real  property.  The  tax  was  collected  not  from  the 
owner  but  from  the  occupier.  Most  of  the  other 
taxes  for  local  purposes  which  have  developed  in 
England  since  then  are  of  the  same  general  char- 
acter. They  are  too  numerous  to  mention  here. 
Besides  the  direct  taxes,  there  were  a  few  indirect 
ones,  market  dues,  road  tolls,  coal  and  wine  duties. 

Sec.  5.    In  the  American  colonies  we  meet  with 

entirely  new  conditions.     Public  needs  were  simple 

Peculiar  con-    and  f cw,  and  were  mostly  local  in  charac- 

i  ions  xn         ^^^      Customs  duties  were  for  the  most 

American 

colonies.  part  Controlled  by  the  mother  country  in 

the  interests  of  her  general  colonial  policy.  So  the 
colonists  were  driven  to  other  forms  of  taxation. 
Practically  free  trade  in  land  existed.  Land  at  a 
known  selling  value  early  formed  a  large   part   of 


^ 


CHAP.  IV     THE  DEVELOPMENT   OF  TAXATION  Vl\ 

the  property  of  each  citizen,  and  differed  in  no 
essential  particular  from  his  other  property.  There 
were  in  some  colonies,  to  be  sure,  charges  of  a  feudal 
nature  known  as  quit  rents,  which  were  a  recogni- 
tion of  the  king's  interest  in  the  land. 
These  never  became  of  fiscal  importance,  ^""'^  ''^^' 
and  never  developed  into  taxes.  Nor  do  they  seem 
to  have  ever  seriously  modified  the  essentially  free 
character  of  land-owning,  since  they  were  so  irregu- 
larly and  meagrely  collected.  They  were  "  acknowl- 
edgments His  Majesty  receives  of  the  People's 
Tenure  and  Subjection."  i  At  times  they  devel- 
oped into  an  apparent  tax  on  certain  lands.  They 
seldom  formed  a  part  of  the  revenues  of  the  colonial 
treasuries,  being  generally  payable  to  the  king.2 

Just  as  there  were   three  different  forms  of  gov- 
ernment  among  the  colonies,  so  there  were  in  the 
beginning  three   different  tendencies   in   The  New 
taxation.3     New  England  began  with  a  ^^^"^'^^f^ 

an  on  property 

tax  on  property  and  faculty.  The  Gen-  and  faculty. 
eral  Court  of  Massachusetts  laid  down  in  1634  the 
following  principle  :  "  In  all  rates  and  public  charges 
the  towns  shall  have  respect  to  levy  every  man 
according  to  his  estate,  and  with  consideration  all 
other  his  abilities  whatsoever,  and  not  according  to 

1  Spottiswood  Letters,  quoted  by  Ripley,  Financial  History  of 
Virginia. 

2  See  Wood,  History  of  Taxation  in    Vermont^  p.   13.     Also 
Schwab,  History  of  the  New  York  Property  Tax. 

3  Cf.  Seligman,  Essays,  p.  19  ff. 


172  INTRODUCTION   TO  PUBIIC  FINANCE    part  n 

the  number  of  his  persons."^  Later,  however,  poll 
taxes  were  use^d,  and  the  general  property  tax  was  ex 
tended  to  covet*^roperty  in  the  process  of  acquisition, 
or  the  earnings  of  labour.  In  all  the  New  England  col- 
onies the  resulting  system  was  practically  as  follows: 
Each  person  was  to  contribute  as  he  was  able.  Abil- 
The  New  ^^J  ^^^^  measured,  first,  by  property,  real 

England  and   personal;  secondly,  by   the   person 

sys  m.  himself;  thirdly,   in   the   case   of   wage- 

earners,  merchants,  and  others,  by  earnings.  With 
a  few  notable  exceptions,  as  in  the  case  of  law- 
yers, the  third  measure  of  ability  gradually  fell 
into  disuse.  It  has  been  repeatedly  pointed  out^ 
that  the  New  England  people  had  the  habit  of  saving. 
All  earnings  were  soon  turned  into  property.  So 
that  the  demands  of  justice  were  fully  met  by  the 
general  property  tax  and  the  poll  tax.  In  addition 
to  these  direct  taxes,  there  were  a  number  of  indirect 
taxes,  "imposts,"  some  collected  in  the  form  of 
licenses,  and  many  as  excises. 

In  the  Southern  colonies,  of  which  Virginia  will 
serve  as  a  model,  the  first  taxes  were  the  poll  taxes. 
"  Personal  responsibility,"  says  Ripley,  "  was  thus 
the  basis  of  taxation  at  first,  but  as  the  burden  of 
taxation  became  heavier  this  liability  was  partly 
transferred  to  real  estate."  ^     This  transfer   of  the 

1  Massachusetts  Records,  quoted  by  Douglas,  Financial  History 
of  Massachusetts,  p.  18. 

2  Walker,  "The  Bases  of  Taxation,"  Political  Science  Quar- 
terly,  Vol.  III. 

*  Financial  History  of  Virginia,  p.  21. 


CHAP.  IV     THE  DEVELOPMENT  OF  TAXATION  173 

burden    to   real   estate   began   with  the  practice  of 
making  the  personal  tax  a  lien  upon  the 
property  of  absentees,  or  of  persons  dy-  t^^TZd^ 
ing  before  the  payment  of  the  tax.     The  '''^^'''^^ 
general  property  tax  in  a  form  like  that  in  use  in 
New  England  did  not  exist  in  Virginia  before  the 
Revolution.       The   grossness   of  the   poll   tax   was 
modified   by  some   reference  to  the  different  kinds 
of  property  owned.     In  consequence  of  the  failure 
to  develop  a  good  system  of  direct  taxes  Virginia  re- 
sorted to  indirect  taxes,  export  duties  on  tobacco  and 
hides,  import  duties  on  liquors  and  slaves,  and  some 
general  tunnage  duties  forming  the  main  features. 

The  third  or  central  system  is  fairly  represented 
by  New  York.  There,  under  the  West  India  Com- 
pany, 1621-1664,  taxation  first  took  the  jv^u?  York 
form  of  moderate  indirect  taxes  on  goods  «a^*»es. 
imported  and  exported  and  imposts  on  the  consump- 
tion of  beer,  wine,  and  spirits.  It  was  after  the 
passage  of  the  colony  into  the  hands  of  the  English 
that  attempts  were  made  to  develop  the  property 
tax.  The  actual  existence  of  this  tax  begins  with 
the  formation  of  the  Assembly  after  1683.^ 

In  all  parts  of  the  United  States  after  the  Revolu- 
tionary War  the  main  reliance  for  local  revenue  was 
the  general  property  tax.  The  commonwealths,  as 
such,  had  little  need  for  revenues  until  after  1840. 

^  See  Schwab,  Bie  Entwickelung  der  Vermogensteuer  im  Staate 
New  York,  Jena,  1890.  Also  Schwab,  History  of  the  New  York 
Property  Tax,  Pub.  of  the  Amer.  Econ,  ^6'^n.,  V,,  5. 


174  INTRODUCTION  TO  PUBIIC  FINANCE    part  ii 

In  the  formation  of  the  Union  indirect  taxes  were 
made  the  prerogative  of  the  federal  government,  so 
that  the  commonwealths  had  to  resort  to  other 
means.  The  character  of  direct  taxation  in  the 
United  States  since  the  formation  of  the  Union  will 
be  treated  in  the  next  chapter.  The  differences  in 
the  forms  of  taxation  in  the  different  parts  are  due 
both  to  political  and  economic  differences. 


if 


CHAPTER  V 

THE   DEVELOPMENT   OF    TAX   SYSTEMS  SINCE  THE 
INDUSTRIAL   REVOLUTION 

Section  1.    The    trend  of    the   development  of 
taxation    was   abruptly   changed   by  the   industrial 
revolution  at  the  close  of  the  last  cen-   changes  in 
twYy.    On  the  one  hand,  the  development  taxation  due 
of  constitutionalism,  vesting,  as  it  did,  tlai't'^oit 
the  control  of  the  purse  in  the  people,  '^^"• 
and  especially  in  the  taxpayers,  had  the  inevitable 
effect   of   changing   the   ideas    underlying   the   tax 
systems.     New  ideas  as  to  the  justification  of  taxa- 
tion developed,  and  with  them  a  tendency  to  seek 
new  measures  of  taxation.     On  the  other  hand,  the 
rapid  increase  in  wealth,  the  growth  of  new  forms 
of  wealth,  such  as  invested  capital,  the  birth  of  new 
kinds  of  property,  and  of  ways  of  holding  property, 
as  the  many  kinds  of  credits,  and  the  rapid  change 
in  the  distribution  of  wealth  among  the  different 
classes  in  the  community,  —  all  of  these  and  other 
similar  causes  led  to  the  constant  extension  of  taxa- 
tion to  the  new  forms.     Old  taxes  which  were  well 
suited  to  certain  simpler  conditions  of  society  become 
under  new  conditions  unjust,  and  give  rise  to  dissat- 
isfaction, to  many  attempted  and  some  accomplished 

175 


176         INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

reforms.  These  reforms  in  turn  prove  no  more  satis 
factory  in  the  long  run,  for  the  conditions  they  were 
intended  to  meet  change  again. 

Just  as  the  attention  of  economists  was  chiefly 
directed  to  the  study  of  productive  agencies  during 
Taxation  of  ^^^^  ^^^^  three-quarters  of  the  century, 
the  agents  of     so    the   general  tendency    of    the   same 

production.  •     i   •      n  i       t_         ji  t_ 

period  m  iinance  may  be  broadly  charac- 
terised as  an  attempt  to  compel  the  different  agen- 
cies of  production  to  contribute  to  the  support  of 
the  government.  It  is  claimed  that  economists 
have,  during  recent  years,  turned  their  attention 
more  to  the  consideration  of  questions  of  distribu- 
tion, and  it  is  certainly  true  that  the  most  recent  tax 
reforms  have  been  in  the  direction  of  securing  a 
better  division  of  the  burden  among  the  sharers  of 
Taxation  of  ^^^®  "^^  Wealth  rather  than  among  the 
the  shares  in     producers  thereof.     Subordinate  to  this 

tendency  are  various  proposals  and  at- 
tempts to  alter  the  distribution  of  wealth  by  the 
use  of  the  taxing  power. 

The  demands  upon  the  revenues  increased  vastly 
during  and  immediately  after  the  period  of  war 
which  followed  the  French  Revolution.  Large  debts 
had  been  accumulated ;  great  armies  and  navies 
Effect  of  tran-  claimed  support  even  in  times  of  peace. 
"money  ecorv-  ^^^  functions  were  being  thrust  upon 
omy."  the   governments.      Moreover,   the   new 

economic  era  demanded  the  payment  of  all  charges 
upon  the  State  in  money  and  necessitated  the  col- 


CHAP.  V     THE  DEVELOPMENT  OF  TAX  SYSTEMS      177 

lection  of  revenues  in  money.  The  old  feudal 
receipts  and  services  became  more  and  more  inade- 
quate ;  new  industrial  receipts  were,  in  general,  not 
calculated  to  be  much  larger  than  the  sums  neces- 
sary to  support  the  service  or  institution  which 
furnished  them.  Consequently,  taxation  on  an  ever 
increasing  scale  becomes  the  basis  of  all  State 
finances.  Taxation  is  no  longer  regarded  as  a 
temporary  expedient  to  meet  passing  and  extraor 
dinary  needs.  It  is  admittedly  a  necessary  and 
permanent  policy. 

The  doctrine  of  political  equality  when  generally 
accepted  leads  to  a  demand  for  universality  and 
equality  of  taxation.  The  difficulties  Effects  of  poiu- 
that  arise  are  no  longer  as  to  the  justi-  *^"^  equality. 
fication  of  taxation  in  general,  but  as  to  the  justice 
of  certain  forms  and  measures  of  taxation.  The 
main  question  is,  what  is  equality,  and  what  the 
best  method  of  attaining  it.  The  methods  and 
direction  of  reform  were  necessarily  prescribed 
by  the  constitutions  of  the  various  countries  and 
differ  much  from  land  to  land.  Different  economic 
and  social  conditions  have  also  an  inevitable  effect. 
Among  the  constitutional  features  that  determine 
the  direction  of  taxation  the  following  may  be 
mentioned.  First,  federal  governments  have  gen- 
erally been  excluded  from  the  field  of  Federal  gov 
direct  taxation.  The  central  govern-  "^^^Tildirect 
ments  of  the  German  Empire,  Switzer-  taxes. 
land,  and  the  United  States  depend   for  revenues 


178         INTRODUCTION  TO  PUBLIC  FINANCE     part  il 

from  taxation  on  customs  duties  and  internal  ex- 
cises. The  sense  of  personal  loyalty  to  the  central 
government  is  inferior  to  that  to  the  commonwealth 
governments  so  far  as  willingness  to  contribute 
directly  to  its  support  is  concerned.  Those  who 
pay  a  direct  tax  wish  to  see  the  money  expended 
near  at  hand  and  under  their  own  eyes.  The  partial 
concealment  or  at  least  lack  of  prominence  of  the 
indirect  contribution  permits  of  its  collection  with- 
out calling  the  attention  of  the  contributors  forcibly 
to  the  fact  that  they  are  taxed  by  a  new  authority. 
Just  that  advantage  of  partial  concealment  in  this 
tax  which  appealed  so  strongly  to  the  monarchies, 
before  the  birth  of  political  consciousness  on  the 
part  of  the  people,  appeals  to  the  federal  govern- 
ments. At  the  same  time  the  practical  necessity 
of  uniform  rates  over  the  whole  country,  which 
arises  from  the  fact  that  these  taxes  disturb  the 
economic  balance  of  industry  and  commerce,  and 
the  greater  ease  of  administration  with  a  larger 
territory  and  a  single  boundary,  make  it  advisable 
to  put  all  of  them  in  the  hands  of  the  central  organ. 
It  was  the  latter  considerations  in  regard  to  custom 
duties  that  led  to  the  establishment  of  the  Zollverein 
and  eventually  of  the  German  Empire. ^ 

On  the  other  hand,  the  different  States  of  which 
the  federal  governments  are  composed  have  shown 

^See  Bowring's  Report  on  the  Prussian  Commercial  Union, 
Parliamentm^  Documents,  1840,  Vol.  XXL,  pp.  1-17.  Reprinted 
in  Rand,  Economic  History,  p.  170.  Also  Legoyt's  La  France  et 
VJ^tranger,  Vol.  I.,  pp.  250-256 ;  ibid. 


1 


CHAP.  V     THE  DEVELOPMENT  OF  TAX  SYSTEMS    179 

themselves  inclined  to  restrict  their  taxation  to  the 
direct  taxes,  leaving  all  but  a  few  of  the  indirect 
ones  to  the  central  governments. 

But   this   separation   of  the  assessment  of  direct 
and  indirect  taxes  between  different  authorities  has 
been    productive   of    great    difficulties.   Difficulties 
For  it   is   impossible   to   assess  any  tax  ^^^^"-'^^^ 

from  a  divi- 

justly  and  equally  without  reference  to  siono/thetax- 
the  other  burdens  already  imposed  on  *^p^^«^- 
the  contributors.  It  would  seem  that  the  demands 
of  justice  which  dictate  that  the  whole  system  of 
taxation  should  work  toward  a  definite  and  single 
purpose,  will  necessitate  either  the  coordination  of 
these  forms  or  the  placing  of  both  of  them  in  the 
hands  of  the  same  authorities.  The  proper  co- 
ordination of  all  taxes  is  hard  to  accomplish  when 
the  taxing  power  is  in  different  hands.  This  is  one 
of  the  hardest  problems  of  American  taxation. 

The  development  of  direct  taxation  will  now  be 
traced  in  detail  by  reference  to  some  of  the  more 
important  countries.  Indirect  taxes  cannot  prop- 
erly be  said  to  have  undergone  any  process  of 
development.  Many  changes  have,  indeed,  been 
made,  dictated  by  different  economic  theories  and 
purposes.  But  it  has  been  simply  a  flux  backward 
and  forward.  Sometimes  ulterior  aims,  as  protec- 
tion, have  been  abandoned  and  strict  fiscal  principles 
allowed  sway.  In  those  cases  we  find  a  simplifica- 
tion and  a  decrease  in  the  number  of  articles  taxed 
But  no  general  principles  have  been  developed. 


180  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

Sec.  2.  Probably  the  most  thorough  attempts  to 
reform  taxation  in  accord  with  clearly  recognised 
principles  of  theoretical  justice  have  been  in  Prussia. 
That  country  has  taken  advantage  from  time  to 
time  of  the  advice  of  men  of  science.     It  has  been 

Prussiamade     ^^^^^^    ^^^PPJ     C^)     ^^    ^^^"^^    a   gOodly 

use  of  men  of  number  of  un  partisan  financial  scientists 
science.  ^^  draw  upou  ;   (2)  in  being  able  to  draw 

upon  them  for  advice,  either  by  counting  their  pupils 
among  its  fiscal  officers  or  placing  the  scientists 
themselves  on  its  tax  boards  and  commissions.  It 
has  been  able  to  make  changes  with  a  broad  conser- 
vatism that  looked  toward  the  gradual  realisation  of 
accepted  ideals.  With  characteristic  visionary  eager- 
ness, France  has  several  times  started  out  to  obtain 
Little  advance  at  a  single  bound  some  new  ideal,  but 
in  France.  Yi-ds  each  time  fallen  back  upon  forms 
and  methods  but  little  better  than  those  in  vogue 
before.  In  England,  special  difficulties  and  objec- 
tions have  been  met  with  little  reference  to  any 
E    land  general  plan.      The   result   has   been   a 

moves  special  steady  approach  to  a  better  state  of 
•'""    ■  affairs,  with  only  an  occasional  intensi- 

fication of  existing  evils,  due  to  the  attempt  to 
cure  symptoms  rather  than  to  seek  the  underlying 
causes  of  the  trouble.  In  the  United  States  there 
No  consistent  ^^^^  ^®^^  Spasmodic  and  ill-directed  at- 
reforms  in  the  tcmpts  at  the  removal  of  a  few  clearly 
'  "*'^  ^^^^'  recognised  abuses  ;  and  without  any  con- 
sistent attempt  to  change  the  system,  the  result  has 


CHAP.v      THE  DEVELOPMENT  OF  TAX  SYSTEMS     181 

been  a  decided  modification.  The  genera]  failure  of 
the  property  tax  to  reach  personal  property  gave 
rise  at  first  to  vigorous  efforts  to  extend  and  sharpen 
the  methods  of  assessment.  These  attempts  fail- 
ing,  other  methods  of  reaching  the  mass  of  personal 
property  were  devised,  which  have  resulted  in  a 
partial  change  of  system  wherever  they  have  been 
successful. 

Sec.  3.    The  most  instructive  country  to  study  is 
Prussia.     The  line  between  the   old   and   the  new 
may  be  drawn  at  the  reforms  of  Stein  and  Harden- 
burg  in  the  forms  of  land  tenure.     These    reforms 
may  be  regarded  as  having  been  accom-   EstaUishmeru 
plished   in    1811.     Briefly   stated,    their  '?//^««<^«<^ 
result  was  to  abolish  personal   serfdom,  PrS^''' 
dissolve  the  feudal  partnership  between  tenants  and 
proprietors,  and  establish  free  trade  in  land.i     Al- 
though these  reforms  had  to  do  mainly  with  land 
and  although  the  accompanying  edict  of  1810  prom- 
ised  speedy  reform   of   the  land   tax   on   the   basis 
of  a  new  survey,  or  cadastre,  nothing  material  was 
accomplished  in  the  reorganisation  of  this  tax  until 
1861.     In  that  year  the  land  tax  was  re- 
arranged for  the  entire  kingdom  on  the  "     ^* 
basis  of  a  new  and  rapidly  executed  survey.     Some 
twenty   different    provincial   land    taxes,   with    up- 

Seeley's  Life  and  Times  of  Stein,  Vol.  I.,  pp.  187-297.  Morier, 
*'  The  Agrarian  Legislation  of  Prussia  during  the  Present  Century," 
in  Probyn  [Editor],  Systems  of  Land  Tenure  in  Various  Countries^ 
pp.  306-316.     See  Selections  in  Rand. 


18^       Introduction  TO  public  finaiNce  tAkx  it 

wards  of  one  hundred  minor  variations,  which  had 
existed  before  that  time,  were  merged  into  an  ap- 
portioned tax  upon  the  net  product  of  each  piece 
of  land  as  given  in  the  cadastre.  This  tax  recently 
yielded  about  40,000,000  M.  annually. 

The  reforms  which  preceded  this  were  those  cf 
the  indirect  consumption  taxes,  out  of  which  finally 
Consumption    emerged   the   personal    class    tax.     The 

X^rZedZul  ^^^^^  ^^  -^^^^^  which  was  referred  to 
personal  taxes,  above  as  promising  a  reform  of  the  land 
tax,  seriously  attempted  to  remove  inequalities  by 
destroying  many  feudal  exemptions  and  privileges, 
and  removing  local  differences.  A  general  scheme 
of  consumption  taxes  on  necessaries,  of  which  the 
excise  on  meal  is  a  type,  was  planned  for  city  and 
country  alike.  It  was,  however,  immediately  found 
that  the  meal  tax  was  hard  to  collect  in  rural  parts. 
As  early  as  1811,  therefore,  a  poll  tax  of  one-half 
thaler  from  every  person  over  twelve  years  of  age 
was  substituted  for  the  meal  tax  in  all  places  except 
the  larger  towns.  In  1820  this  tax,  still  applying 
to  the  same  places,  developed  into  a  classified  poll 
tax  ;  i.e.  all  persons  were  grouped  according  to 
rank,  profession,  and  general  prosperity,  into  a  few 
classes,  which  were  then  taxed  per  capita  at  different 
^^    ,  rates  for  each   class.     Somewhat   modi- 

I  he  class  tax. 

fied  the  next  year,  so  as  to  make  twelve 
classes,  in  groups  of  three  each,  and  with  rates 
which  ranged  from  one-half  thaler  to  144  thalers, 
and  covering  all  persons   over   fourteen  years   old. 


CHAP.  V       THE  DEVELOPMENT  OF  TAX  SYSTEMS    183 

this  tax  endured  thirty  years.  As  before,  this  tax 
did  not  extend  to  the  large  cities,  where  the  excise 
on  meal  and  meat  was  regarded  as  placing  the  same 
burden  on  the  people.  Such  a  remarkably  clear 
perception  of  the  fact  that  indirect  taxes  are  practi- 
cally the  equivalent  of  direct  taxes  m  the  individual 
burden  they  impose  is  not  often  met  with  in  fiscal 
history. 

In  1851,  this  tax  was  changed  in  order  to  make 
room  for  the  introduction  of  an  income  tax  on  all 
persons  having  an  income  of  over  1000  The  income 
thalers.  Those  persons  whose  incomes  '<*^' 
were  below  this  amount  were  taxed  in  the  large 
cities  by  the  meal  and  meat  tax  ;  in  the  country  and 
in  small  towns,  by  a  class  tax,  like  the  old  one,  with 
rates  ranging  from  one-half  thaler  to  24  thalers, 
according  to  the  supposed  income.  Persons  living 
in  large  cities  who  paid  the  income  tax  were  allowed 
to  deduct  20  thalers  from  their  income  as  com- 
pensation for  the  meal  and  meat  tax  they  were 
supposed  to  have  paid.  Later  reforms  removed 
these  gate  excises  except  for  local  purposes.  As 
the  income  tax  forms  a  special  topic  in  a  later 
chapter,  we  will  not  at  present  follow  the  details 
of  its  development  and  reform.  It  is  sufficient  to 
say  that  it  was  a  progressive  tax  on  the  income 
of  every  person. ^ 

When  the   land   tax   was   reformed   in   1861,  the 
building   tax    was   separated   from   it,  having   been 
1  See  Chap.  IX. 


1 


184  INTRODUCTION   TO  PUBIIC  FINANCE    part  n 

until  that  time  a  part  of  it;  and  all  old  taxes  of 
a  similar  sort  were  merged  in  the  new  one.  This 
tax  is  assessed  in  the  cities  according  to  the  rental 

of  the  buildings,  and  in  the  country  ac- 
iTifir  ax.  gQj.^^j^g  ^^  ^^  gj^e  of  the  lands  con- 
nected with  the  houses,  and  other  characteristics. 
One  of  the  reforms  that  was  made  after  the  peace 
of  Tilsit  to  strengthen  the  weakened  economic  re- 
sources of  the  country  was  the  establishment  of 
general  industrial  freedom.  Naturally,  such  a 
change  would  have  been  regarded  as  a  failure  from 
the  standpoint  of  the  statesmen  of   the   times,  if   it 

could  not  be  made  to  yield  a  revenue  to 

Industry  tax.        ,  ,  .     ,  . 

the  treasury  ;  so  the  new  industries  were 
burdened  with  a  new  tax.  This  tax,  which  was 
very  weak,  and  which,  wisely,  perhaps,  failed  to 
meet  all  the  new  forms  of  industry  which  came  into 
existence,  was  subjected  to  a  thoroughgoing  reform 
in  1891.  But  it  was  at  that  time  transferred  to  the 
local  governments.  Capital  invested  and  some  of 
the  permanent  features  of  each  business  form  the 
basis  of  this  tax. 

The  Prussian  system,  as  it  existed  before  the 
great  reforms  of  1893,  may  now  be  seen  as  a  whole. 
It  consisted  of  two  parts  :  (1)  There  was  a  group 
Summary  of  of  three  Complementary  taxes  upon  the 
the  Prussian     producc  of  property    and   capital,  —  the 

system  before      ^  .      .  . 

the  recent  land  tax,  the  building  tax,  and  the  in- 
reforms.  dustry  tax ;  (2)    there  was  a  system  of 

personal    taxes    culminating    in    an     income     tax. 


CHAP.  V    THE  DEVELOPMENT  OF  TAX  SYSTEMS     185 

The  former  group,  true  to  the  economic  tenets  of 
the  first  three-quarters  of  the  century,  taxed  the 
productive  agencies.  The  latter,  although  it  orig- 
inated as  a  consumption  tax,  aimed  at  taxing  the 
shares  in  distribution.  Thus  the  older  consumption 
taxes,  which  were  originally  assessed  without  any 
very  clear  idea  of  what  the  justification  was,  but 
were  used  because  productive  of  large  revenues, 
yielded  to  new  taxes  supposed  to  be  more  fairly 
in  accord  with  the  modern  system  of  distribution. 

We  are  now  in  position  to  see  the  significance 
of  the  great  reforms  of  1893  (all  of  which  went 
into  effect  in  1895),  made  under  the  The  great  re- 
leadership  of  Finanzminister  Dr.  Miquel.  forms  of  i89S. 
These  reforms  place  Prussia  far  in  advance  of  all 
other  countries  in  the  theoretical  perfection  of  her 
tax  system.^  The  income  tax,  which  has  long  been 
correctly  regarded  as  the  foundation  of  the  Prussian 
tax  system,  was  subjected  to  a  thorough  reform  in 
1891.2  It  ^as  strongly  urged  at  that  time  that 
income  from  property  represented  a  far  higher  fac- 
ulty, per  unit,  than  income  from  labour  and  personal 
exertion,  and,  therefore,  that  a  perfect  system  should 
contain  two  kinds  of  progression  :  one  that  taxed 
larger  incomes  more  heavily  than  smaller  ones ; 
another  that  taxed  incomes  from  property  more 
heavily   in   proportion   than   incomes   from   labour. 

1  See  Seligraan,  Essays,  pp.  330-339.     References  to  larger  and 
more  detailed  statements  are  given  there. 

2  See  Chap.  IX. 


186 


INTRODUCTION   TO  PUBLIC  FINANCE    part  n 


The  general 
property  tax. 


It  was  felt  that  the  existing  produce  taxes  (^Er- 
tragsteuern},  the  land,  building,  and  industry 
taxes,  failed  to  accomplish  this  end.  Hence  one  of 
the  reforms  of  1893  was  the  surrender 
of  these  taxes  to  the  communes,  and  the 
initiation  of  a  general  property  tax  as  supplement- 
ary to  the  income  tax.  This  tax,  which  can  be 
properly  understood  only  when  its  supplementary 
character  is  held  in  mind,  is  arranged  as  follows  : 

The  tax  is  one-half  per  mill  on  the  lower  limit  of 
the  class  within  which  the  property  falls.  The  classes 
go  by  stages  of  2000  M.  from  6000  M.  to  40,000  M., 
of  4000  M.  up  to  60,000  M.,  of  10,000  M.  up  to 
200,000  M.,  and  above  that  of  20,000  M.  each. 

Thus : 


From 


Pbopektv 

Tax 

Up  to    6,000  M.    . 

exempt. 

6,000  "     8,000  "       . 

.      3M. 

8,000  "  10,000  "      . 

.      4  « 

10,000  "  12,000  "       . 

.      5  « 

20,000  "  22,000  "      . 

10  « 

40,000  "  44,000  "       . 

.    20  « 

60,000  "  70,000  "       . 

.    30  «  etc. 

Above  200,000  M.  the  stages  are  20,000  M.  each, 
and  the  tax  increases  10  M.  in  each  stage. 

This  tax  being  supplementary  to  the  income  tax 
accomplishes  the  result  of  imposing  a  differential 
rate  on  funded  income  as  against  unfunded  income. 

The  abandonment  by  the  State  of  the  three  old 
taxes  on  land,  buildings,  and  industry  rendered  the 


CHAP.  V     THE  DEVELOPMENT  OF  TAX  SYSTEMS    187 

reform  of  local  taxation  possible.  As  has  already 
been  said,  the  proper  coordination  of  all  tax  burdens  is 
one  of  the  chief  problems  of  modern  tax  The  reform  of 
reform.  With  the  exception  of  the  beer  ^^ai  taxation. 
taxes,  and  the  meat  and  meal  taxes  still  used  by  some 
of  the  cities,  local  taxation  in  Prussia  is  mainly  direct. 
Most  of  it,  until  1895,  took  the  form  of  percentages 
additional  to  the  rates  of  the  royal  taxes.  In  some 
cities  there  were  important  special  local  taxes,  like 
the  house  rent  tax  in  Berlin.  Prussia,  also,  grants 
subsidies  from  the  royal  treasury  to  the  local  bodies 
for  special  purposes.  But  the  symmetry  of  the , 
national  system  was  somewhat  destroyed  by  these 
additional  rates.  Such  additions  to  the  income  tax 
were  especiall}^  intolerable.  Real  estate  is,  moreover, 
a  particularly  good  basis  for  local  assessment.  It 
cannot  evade  the  tax,  and  it  is  the  recipient  of  par- 
ticular benefits  from  good  local  government.  The 
same  is  true  of  businesses  of  a  local  character,  al- 
though it  is  not  safe  to  let  the  rate  vary  from  place  to 
place.  Hence  these  three  taxes  were  handed  over 
to  the  local  bodies.  At  the  same  time  the  attempt 
was  made  to  regulate  all  other  sources  of  local 
revenues. 

The  Prussian  system  as  it  now  stands  comes 
nearest  to  the  realisation  of  the  taxation  of  faculty 
of  any  in  the  world.  The  chief  difficulties  that  have 
arisen  are  those  of  assessment.  The  progressive  rate 
gives  rise  to  a  special  incentive  to  the  concealment 
of  larger  incomes,  and  not  even  the  general  excel- 


188  INTRODUCTION  TO  PUBLIC  FINANCE    part  il 

lence  of  Prussia's  administration  has  been  preventive 
of  under-assessment.i 

Sec.  4.  In  France  indirect  taxation  has  probably 
found  a  higher  development  than  anywhere  else. 
Indirect  taxes  yielded  in  1908  over  2,000,000,000 
francs,  against  560,000,000  francs  from  direct  taxes. 
Some  of  the  main  taxes  are  on  the  consumption  of 
wine,  spirits,  beer,  sugar,  salt,  tobacco,  etc.  ;  there 
are  also  the  octrois  or  gate  duties  collected  by  some 
High  develop-   of  the  citlcs  as  a  mcans  of  contributing 

mentofindi.  ^j^^-^  ^^^^^  ^^  ^^^^^  ^^  ^^^^  ^.^.^^^  ^^^^^ 
reel  taxes  m 

France.  to  the  general  treasury.     There  are  also 

the  taxes  on  acts  and  transfers,  which  will  be  treated 
under  fees,  since  they  assume  a  private  benefit,  and 
the  customs  duties.  Not  peculiar  to  France,  but 
receiving  a  high  development  there,  is  the  mode 
of  collecting  a  tax  on  consumption  by  a  monopoly 
of  the  manufacture  of  tobacco  in  the  hands  of  the 
government.  The  imperative  necessity  under  which 
France  has  laboured  all  through  this  century  of 
continually  increasing  her  revenues,  and  the  danger 
of  making  the  burden  unbearable  if  thrown  upon 
the  existing  direct  taxes,  as  well  as  the  desire  on  the 
part  of  the  legislators  of  concealing  so  far  as  possible 
the  actual  burden,  lest  an  impatient  constituency 
rebel,  accounts  well  for  the  relatively  high  develop- 
ment of  indirect  taxation.     The   preference  for  in- 

1  See  the  revelations  of  the  Bochum  investigations,  quoted  by 
Wagner  in  Schanz  Finanzarchiv,  XVIII.  year,  Vol.  II.,  pp.  107, 
108. 


CHAP.  V     THE  DEVELOPMENT   OF  TAX  SYSTEMS     189 

direct  taxes  as  the  main  reliance  of  the  public 
revenues  argues,  however,  a  low  stage  of  political 
ethics.  The  more  highly  developed  the  conscious- 
ness of  citizenship  and  membership  in  the  State,  the 
easier  it  is  to  make  direct  taxation  effective. 

Direct  taxation  in  France  dates  in  its  present 
form  from  the  Revolution.  All  the  taxes  of  the 
ancient  monarchy  were  abolished  at  that  time  and 
a  fixed  scheme  of  taxes  on  revenue-yielding  property 
substituted.  This  system  of  direct  taxes  The  French 
has  four  chief  members:  (1)  the  tax  direct  taxes. 
on  real  estate,  known  as  the  "  impdt  fonder  "  ;  (2) 
the  apportioned  tax  on  polls  and  rents  of  dwellings, 
"  cote  personnelle  et  mohiliere  "  ;  (3)  the  tax  on  doors 
and  windows,  ''^ impdt  sur  les  portes  et  fenetre%'^ ; 
(4)  the  tax  on  business, ''  impdt  des  patentes.''  ^  Sup- 
plementary to  these  taxes  are  a  number  of  taxes 
classed  as  "assimilated  to  the  direct  taxes."  These, 
so  far  as  they  flow  into  the  central  treasury,  are  : 
(1)  the  mining  dues,  or  the  royalties  from  the  min- 
ing rights,  "  redevances  des  mines'^ ;  (2)  the  fees  for 
the  certification  ("  vSrification'^  of  weights  and 
measures  ;  (3)  the  tax  on  property  held  in  mort- 
main, that  is,   property  held  in  perpetuity  by  the 

i"Pa«en«es"  is  translated  by  Leroy  Beaulieu  by  "licenses." 
Science  des  Finances,  Vol.  I.,  p.  395.  There  is  no  exact  English 
equivalent.  The  "license"  in  this  case  is  little  more  than  evidence 
of  the  payment  of  the  tax.  The  term  "  patent"  does  not  seem  to 
imply,  as  the  term  "  license  "  does,  the  granting  of  a  special  privi- 
lege. The  term  "license"  is,  however,  not  infrequently  used  in. 
English  to  indicate  a  tax  on  business. 


190         INTRODUCTION   TO  PUBLIC  FINANCE     part  u" 

communes^  hospitals,  churches,  seminaries,  charitable 
institutions,  and  the  like,  "  taxes  des  Mens  de  la  main 
morte  "  ;  (4)  the  taxes  on  horses  and  carriages,  "  irri' 
p6t  8ur  les  ehevaux  et  Us  voitures^^;  (5)  a  number  of 
miscellaneous  fees  and  charges  of  which  the  charges 
for  the  inspection  of  pharmacists,  grocers,  druggists, 
and  herbists  are  examples.  \ 

The  real  estate  tax,  the  poll  and  rents  of  dwellings 
tax,  and  the  door  and  window  tax  are,  in  most  part, 
apportioned  taxes.  The  real  estate  tax  was,  down 
to  1890,  a  combined  tax  on  agrarian  lands  and  on 
impst  land  with  buildings.     It  was  apportioned 

fonder.  on  the  basis  of  a  very  elaborate  survey 

and  valuation  completed  in  1850  and  carefully  kept 
up  to  date.  These  taxes,  like  the  other  apportioned 
taxes,  were  apportioned  in  successive  steps,  first  to 
the  dSpartments,  then  to  the  arrondissements^  and 
then  to  the  communes,  by  the  several  legislative 
bodies,  and  finally  divided  among  the  individuals  in 
each  of  the  communes  by  a  ''•conseil  de  repartition.''^ 
In  1890  the  tax  on  dwellings,  that  is,  the  tax  on  land 
with  buildings  on  it  (propriStS  hdtie},  was  separated 
from  the  agrarian  land  tax  and  the  amount  levied 
on  the  land  was  somewhat  reduced.  In  1897  fur- 
ther relief  was  granted  to  small  landed  properties. 
In  1908  the  impdt  fonder  yielded  200,000,000  francs. 
The  land  tax  is  still  an  apportioned  tax,  but  that  on 
dwellings,  or  on  propriete  bdtie,  is  now  proportioned, 
and  the  uniform  rate  is  about  3.2  per  cent.  ^M 

The  tax  on  polls  and  rents  of  dwellings  is  peculiaif^^ 


CHAP.  V     THE   DEVELOPMENT  OF  TAX  SYSTEMS     191 

to  France,  the  same  combination  not  being  found  in 
the  tax  systems  of  other  countries,  although  the  ele- 
ments thereof  are  not  uncommon.  This  tax,  the 
personnel-mohilier^  as  it  is  called,  is  two  Personnel- 
taxes  in  one,  a  tax  on  polls  and  a  tax  ^obUier. 
bearing  the  somewhat  misleading  designation  "  mo- 
hilier.''  This  latter  tax  was  originally  designed  to 
cover  personal  property,  hence  its  name,  and  thus  to 
supplement  the  impot  fonder.  The  personal  or  poll 
tax  element  of  this  tax  is  due  from  every  citizen  of 
France  and  from  every  resident  enjoying  civil  rights, 
except  paupers,  married  women  living  with  their 
husbands,  and  children,  whether  of  age  or  not,  living 
with  their  parents  or  guardians,  and  not  enjoying  an 
independent  income.  It  is  the  same  in  rate  for  all 
the  inhabitants  of  a  given  locality  and  the  rate  is 
fixed  at  three  days'  wages.  The  rate  at  which  the 
wages  shall  be  assessed  is  determined  each  year  by 
the  general  council  of  each  department.  It  may, 
however,  not  be  fixed  at  less  than  one-half  franc, 
nor  at  more  than  one  franc  and  a  half.  Thus  the 
minimum  tax  is  one  franc  and  a  half  and  the  maxi- 
mum four  francs  and  a  half.  The  other  element  of 
this  tax,  the  moUlier,  is  assessed  according  to  the 
rental  value  of  inhabited  houses.  It  is  in  this  part 
of  this  two-headed  tax  that  the  apportionment  is 
worked  out.  The  poll  tax  falls  short  of  raising  the 
commane's  share  of  the  combined  taxes,  and  the  bal- 
ance of  the  quota  is  assessed  upon  the  rentals  of 
dwellings  (loyer  de  habitation').     Some  of  the  large 


192         INTRODUCTION  TO  PUBLIC  FINANCE     part  ii 

cities,  Paris,  Lyons,  Marseilles,  and  a  few  others,  raise 
a  part  or  even  the  whole  of  their  quota  by  means  of 
duties  on  goods  brought  into  the  cities,  i.e.  octrois^ 
and  do  not  levy  on  rentals. 

The  door  and  window  tax  is  an  apportioned  tax 
rated  according  to  the  number  of  windows  and 
Partes  et  doors  in  the   houses.     It  was   intended 

fenetres.  ^q  supplement  the  personal  and  dwelling 

tax,  but  it  is  really  an  addition  to  the  real  estate  tax. 
It  is  paid  by  the  owner  and  he  is  allowed  to  shift  it 
if  he  can  to  the  tenant. 

The  business  tax  is  an  old  one.  Established  in 
1791,  remodelled  in  1844,  it  is  now  enforced  under  a 
law  that  was  adopted  in  1880.  Unlike  the  other 
direct  taxes  it  is  regarded,  not  as  an  apportioned, 
impdt  des  but  as  a  proportioned  or  rated  tax.  The 
patentes.  u  impdt  des  pateutes  "  is  imposed  on  every 

person,  native  or  alien,  who  carries  on  any  trade  or 
profession  in  France,  except  agriculture  and  a  few 
others  that  are  especially  exempted.  The  aim  is  to 
tax  the  profits  of  industry  or  of  a  profession,  as 
nearly  as  may  be  proportionately.  The  methods  of 
determining  the  rates  for  the  different  occupations 
or  industries  are  extremely  complex,  so  much  so  that 
only  the  most  general  outline  can  be  attempted  here. 
The  objects  of  this  complex  system  of  rates  are  to 
avoid  on  the  one  hand  any  inquisitorial  prying  into 
the  affairs  of  the  individual  taxpayers,  and  on  the 
other  hand  to  shun  the  danger  of  receiving  false 
declarations  as  to  the  amount  of  the  profits.     This  is 


CHAP.  V     THE  DEVELOPMENT  OF  TAX  SYSTEMS      193 

(lone  by  seizing  upon  certain  concrete,  external  signs, 
or  natural  and  obvious  characteristics,  as  evidence  of 
the  size  of  the  profits.  In  general  the  rates  fall  into 
two  parts.  The  first  is  called  the  fixed  duty  (taxe 
determines^.  This  is  the  same  for  each  occupation 
of  the  same  sort,  and  is  largely  independent  of  any 
of  those  conditions  which  make  one  occupation  more 
profitable  than  another  of  the  same  kind.  The 
second  is  the  proportional  rate,  based  on  certain 
characteristics  that  are  assumed  to  indicate  that  a 
given  industry  is  more  or,  as  the  case  may  be,  less 
profitable  than  another  of  the  same  kind.  The  fixed 
duty,  however,  is  not  the  same  in  all  towns,  for  it  is 
assumed,  for  example,  that  a  druggist  in  a  large  town 
makes  larger  profits  than  one  in  a  small  place.  For 
the  fixed  duty  occupations  are  grouped  in  three 
classes  and  fall  under  schedules  A,  B,  and  C  of  the 
law.  Class  A  includes  the  general  run  of  merchants 
and  artisans.  Merchants  are  again  divided  into 
three  classes,  according  as  they  sell  entirely  at 
wholesale,  partly  at  wholesale  and  partly  at  retail, 
or  entirely  at  retail.  In  this  class  the  fixed  rate  is 
based  on  two  considerations,  (1)  the  nature  of  the 
business  and  (2)  the  size  (population)  of  the  place  in 
which  the  business  is  conducted.  Thus  occupations 
are  divided  into  eight  general  classes  according  to 
their  nature,  and  for  each  of  these  there  are  nine 
ratings  according  to  the  size  of  the  place  in  which 
they  are  located.  Class  B  contains  a  number  of 
businesses  in  connection  with  which  it  seems  neced- 


19-1:         INTRODUCTION   TO   PUBLIC  FINANCE     part  n 

sary  to  consider  the  size  of  the  enterprise  as  well  as 
the  size  of  the  place  and  the  nature  of  the  business. 
So  a  third  set  of  characteristics  is  introduced  sup- 
posed to  show  the  size  of  the  enterprise.  In  this 
class  are  bankers,  department  stores,  water  works, 
hack  and  omnibus  companies.  Class  C  includes  the 
smaller  industrial  pursuits,  handicrafts,  and  the  like. 
In  this  class  the  size  of  the  place  is  not  taken  into 
consideration,  but  some  concrete  index  of  the  size  of 
the  establishment  is  taken  in  connection  with  the 
nature  of  the  business;  Such  indices  are  the  number 
of  appliances,  or  machines  used,  the  number  of  work- 
men employed,  and  the  like.  The  proportional  part 
of  the  rate  is  based  mainly  on  the  rental  of  the  place 
of  business  and  the  rental  of  the  home  the  proprietor 
occupies.  It  varies  for  each  of  the  main  classes  and 
also  within  the  classes.  These  rates  are  for  class  A 
from  two  to  five  per  cent  of  the  rental,  for  those  in 
class  B  ten  per  cent,  in  class  C  from  one  and  two- 
thirds  to  ten  per  cent.  The  "  liberal  "  professions, 
such  as  those  of  lawyers,  doctors,  and  the  like,  pay 
only  the  proportional  rates. 

Direct  taxation  in  France  may  be  summarised  as 
falling  mainly  on  the  agents  of  production  and  the 
sources  of  wealth. 

Sec.  5.  The  English  system  of  taxation  can  be 
very  briefly  treated  here,  because  the  principal  com- 
ponent parts  will  be  discussed  in  detail  in  later 
chapters.  What  is  necessary  here  is  to  give  an 
outline    of   the   system   as   a   whole.     The  greatest 


CHAP.  V    THE  DEVELOPMENT  OF  TAX  SYSTEMS     195 

change  in  the  British  scheme  of  taxation  within 
this  century  was  the  elimination  of  the  Thereformsoj 
protective  princij^le  from  the  customs  iS40-i86o. 
duties,  — and  indirectly  from  the  excises  also,— 
brought  about  in  the  period  from  1840-1850,  by 
the  abolition  of  the  corn  laws  and  the  agitation 
leading  thereto.  The  consequent  simplification  of 
both  the  import  duties  and  the  excises  rendered  it 
possible  to  manage  them  purely  as  a  source  of 
revenue  with  a  view  to  obtaining  relatively  larger 
sums.  The  customs  duties,  the  entire  tariff  of 
which  now  contains  only  40  rates,  and  the  some- 
what more  numerous  excises  and  stamp  duties,  pay 
one-half  the  total  annual  revenue.  The  property 
and  income  tax,  which  was  restored  in  ^, 

I  tie  property 

1842  and  has  since  been  the  variable  or  and  income 
elastic  element  in  the  system,  will  also  '"^* 
receive  special  attention  in  another  chapter.  Inas- 
much as  this  famous  property  and  income  tax  is 
a  system,  in  itself,  of  five  taxes  which  are  calcu- 
lated to  fall  upon  the  chief  sources  of  wealth,  it 
complies,  ^'n  a  way,  with  the  requirements  of  uni- 
versality. Its  rate  is  degressive,  so  that  it  attempts 
to  comply  with  the  requirements  of  justice.  It  may 
be  looked  upon  as  the  complete  system  of  direct 
taxation.  Outside  of  the  system  there  are  two 
remnants  of  older  taxes  which  are  anomalies  and 
destroy,  somewhat,  the  logic  of  the  system.  This 
lack  of  any  logical  reason  for  retaining  them  does 
not  necessarily  form  any  good  reason  for  abolishing 


196         INTRODUCTION   TO  PUBLIC  FINANCE     part  u 

them.  They  give  rise  to  no  serious  complaint,  they 
are  old  and  have  been  in  the  main  capitalised,  so 
that  they  form  no  real  burden  at  present.  They 
are  the  land  tax  of  the  eighteenth  century,  which 
is  now  a  redeemable  rent  charge,  and  the  house 
duty.  This  latter  developed  out  of  the  hearth  tax 
of  1662.  In  1688  it  had  been  replaced  by  a  window 
tax.     In  1778  a  tax  on  the  annual  rental 

The  house  tax.  i  i     i  •      i  inn 

was  added  to  the  window  tax,  and  finally 
after  1851  this  tax  on  the  rental  value  was  left  to 
stand  alone. 

There  is  still  another  tax  which  supplements  the 
property  and  income  tax,  and  that  is  the  inheritance 
The  inherit-  tax.  The  most  rcccnt  changes  in  these 
ancetax.  inheritance   taxes,  —  "death    duties,"  — 

which  have  existed  in  England  since  1694,  will 
receive  attention  under  another  heading.  The  im- 
portant thing  to  note  in  this  connection  is  that  these 
taxes  have  introduced  the  principle  of  progression 
very  extensively  into  the  tax  system  of  England. 

The  English  system  as  it  now  stands,  consists  (1) 
of  the  customs  and  excise  duties  ;  (2)  of  the  so-called 
property  and  income  tax,  a  degressive  tax  upon  five 
kinds  of  income  ;  (3)  two  older  taxes,  the  land  tax  and 
the  house  tax  ;  (4)  a  graduated  inheritance  tax,  and 
(5)  a  number  of  stamp  taxes  on  deeds,  receipts,  and 
so  forth.  1 

1  Williams'  The  King''s  Bevenue  contains  a  fine  outline  of  the 
revenue  system  of  England.  It  is  one  of  the  best  books  of  its  kind 
ever  compiled. 


CHAP.  V    THE  DEVELOPMENT   OF  TAX  SYSTEMS     197 

The  different  authorities  that  have  had  the  power 
to  levy  local  rates  in  England  are  very  numerous. 
The  whole  system  is  very  complex.  The  different 
rates,  each  going  by  the  name  of  the  authority  that 
levies  it,  or  the  purpose  for  w^hich  it  is  collected,  are 
mostly  upon  the  same  base  ;  namely,  the  annual  rental 
of  the  various  tenements.  They  are  generally  levied 
upon  occupiers.  In  the  case  of  tenements  of  less 
than  £10  annual  value,  the  difficulty  of  collecting 
from  the  occupier  is  so  great  that  the  plan  of  making 
the  landlord  advance  the  tax  has  been  adopted.  He 
then  shifts  it  to  the  occupier.  The  recent  reforms 
of  county  and  municipal  government  in  England 
have  resulted  in  a  simplification  of  local  rates. 

Sec.  6.  Like  the  English,  the  American  system 
can  be  but  briefly  treated  here,  since  many  of  the 
taxes  will  receive  our  attention  in  subsequent  chap- 
ters. The  principal  federal  taxes  have  been  customs 
duties  and  excises.  The  states,  or  commonwealths, 
have  confined  themselves  rather  closely  to  direct 
taxes,  as  have  also  the  minor  civil  divisions.  Down 
to  1840,  commonwealth  taxation  was  very  meagre. 
Many  of  the  states  attempted  to  get  along  without 
recourse  to  taxation  at  all,  depending  for  revenues 
upon  the  sale  of  lands,  fees,  and  other  sources. 

The  evolution  of  taxation  in  this  country  during 
this   century  has   resulted   in  little  ad-  ff^g  absence  oj 
vance.     Indeed  it  has  been  to  make  con-  sound  prind- 
fusion  thrice  confounded.     Not  only  has  ^^*" 
difficulty  been  found  in  adjusting  the  spheres  of  the 


198         INTRODUCTION  TO  PUBLIC  FINANCE     part  i\ 

different  taxing  authorities,  but  no  sound  principle, 
indeed  scarcely  any  principle  at  all,  has  been  fol- 
lowed. Before  the  Revolutionary  War  the  general 
property  tax,  whose  origin  w^e  have  already  seen, 
answered  the  requirements  of  justice  and  equality 
fairly  well.  As  has  been  frequently  remarked,  the 
American  people  were  a  saving  race.  As  fast  as 
they  created  wealth  they  turned  it  into  property. 
The  forms  of  property  were,  even  when  not  im- 
movable, tangible  and  unconcealable.  Real  estate 
formed  the  mass  of  it.  Movable  property  consisted 
of  furniture,  farm  utensils,  and  cattle.  There  were 
few  stocks  or  bonds,  or  other  forms  of  credit  in 
which  to  invest  wealth.  Among  such  a  people  a 
tax  levied  on  property  that  was  easily  ascertainable 
answered  all  the  requirements. 

But  as  intangible  personal  property  increased,  as 
opportunities  for  investment  multiplied,  it  became 
The  property  i^npossiblc  to  make  the  property  tax 
tax  not  "gen-  "general."  It  became  a  tax  on  real 
estate  except  for  the  few  conscientious 
persons  who  declared  their  personal  property.  Until 
about  1900  the  commonwealth  legislatures  made  but 
half-hearted  attempts  to  sharpen  the  procedure  of 
assessment.  Since  that  date  a  number  of  the  states 
have  introduced  a  plan  of  central  control  of  the 
local  assessors  by  a  strong  central  commission. 
Wherever  adopted  this  has  resulted  in  marked  im- 
provement in  the  direction  of  greater  equality. 
Prompted  at  first  by  a  wave  of  popular  excitement, 


CHAP.  V     THE   DEVELOPMENT  OF  TAX  SYSTEMS     199 

which  took  the  form  of  a  feeling  of  bitterness  toward 
certain  classes  of   capitalists,  the  legislatures  have 
from  time  to  time,   attempted  to  reach   ThecorporJ 
personality  by  taxing  the  corporations  in  ^^""'^  ^°^^* 
which  the  untaxed  funds  were  invested.   'Ztin^j^e. 
The  resulting  corporation   taxes  worked  some  im- 
provement.    They  supplement  the  general  property 
tax  very  effectively.     Within  the  past  decade  (1899- 
1909)  a  number  of  states  have  been  remodelling  their 
tax  system,  by  selecting  certain  sources  of  re^venue 
for  the  use  of  the  state  or  central  governments  only, 
leaving  the  general  property  tax  to  the  minor  civil 
divisions.     One  general  result  of  this  movement  has 
been  the  taking  over  of  the  taxation  of  corporations 
by  the  state,   with  corresponding   increase   in  effi- 
ciency of  administration.     Sometimes  the  legislatures 
have  attempted  to  tax  mortgages,  as  if  Taxation  of 
they    were   a   part    of   the   property   on  mortgages. 
which  they  rest.     As  mortgages  have  to  be  recorded 
in  order  to  be  legal,  it  is  possible  to  get  at  the  full 
value.     In    some   commonwealths,  then,  the   mort- 
gagee is  taxed  on  his  interest  in  the  property  and 
the  owner  is  exempt  to  that  extent.     In  California, 
where  this  plan  has  been  most  extensively  tried,  the 
result  has  not  been  at  all  what  was  desired.     The 
only  effect  has  been  to  raise  the  rate  of  interest  on 
mortgages  by  the  amount  of  the  tax  plus  from  one- 
fourth  to  one  per  cent.     That  is,  the  mortgagees 
have  succeeded  in  shifting  the  burden  of  the  tax 
to   the  real  owners   with  a  handsome  addition   for 


200         INTRODUCTION   TO   PUBLIC  FINANCE     part  n 

their  trouble.  Such  a  shifting  is  always  possible 
when  any  one  form  of  capital  is  taxed,  leaving  other 
forms  untaxed,  either  because  they  are  exempt  or 
because  they  escape  the  tax.  A  recent  development 
in  some  states  has  been  the  exemption  of  mortgages 
from  taxation  as  property  under  the  general  property 
tax  and  the  substitution  of  a  tax  at  a  low  rate,  known 
as  a  recording  tax.  But  in  general  and  in  most  of 
the  commonwealths  the  American  system  remains 
what  it  has  been  since  1840,  —  a  regressive  tax  on 
real  estate,  supplemented  in  part  by  corporation 
taxes  in  some  commonwealths,  and  by  an  ever 
increasing  number  of  inheritance  taxes.  It  is  a  sys- 
tem condemned  by  every  scientific  writer  and  im- 
partial statesman,  but  retained  as  the  only  source  of 
revenue. 

The  difficulties  which  have  prevented  persistent 
attempts  at  reform  remain,  and  it  is  hard  to  see  how 

Thedifficulties  ^^^^  ^^^  ^^  overcome.  No  one  common- 
in  the  way  of  wealth  Can  afford  to  pursue  personal 
reform.  property  with  so  much  vigour  as  to  act- 

ually impose  a  tax  on  all  of  it.  Only  concerted 
action  could  accomplish  this.  Capital  is  sufficiently 
mobile  to  move  easily  from  commonwealth  to  com- 
monwealth, and  if  compelled  to  bear  its  fair  share  of 
the  burden  in  one  and  not  in  another,  it  will  surely 
migrate.  Legislators  are  extremely  desirous  of 
attracting  capital  and  very  wary  of  repelling  it. 
The  owners  of  capital  cannot  be  taxed  personally. 
They  change   their  residence  from   city  to  suburb 


CHAP.  V     THE  DEVELOPMENT  OF  TAX  SYSTEMS    201 

and  even  to  unfrequented  rural  parts  on  the  slight- 
est  increase  of  local  taxation  and  move  from  com- 
monwealth to  commonwealth  with  equal  facility. 
Residence,  too,  is  a  matter  of  intention,  and  it  is 
easy  if  personal  taxes  are  proposed  to  plead  residence 
in  another  commonwealth.  Concerted  action  being 
practically  impossible,  the  tax-dodger  is  safe. 

But  while  the  present  system  is  very  bad,  it  has 
been  tolerated  in  the  past,  and  arouses  less  discon- 
tent at  present  than  mi^ht  be  expected   „ 

\  or-  Reason  for  the 

because  it  falls  mainly  on  the  receivers  toleration  of 
of  economic  rent.  The  value  of  land  in  ^^««^«^«"*- 
many  parts  of  the  United  States  has  increased  very 
rapidly  and  is  still  increasing  steadily  ;  so  that  in 
those  parts,  while  the  taxed  owner  feels  the  burden 
severely,  he  consoles  himself  with  the  thought  that 
he  is  largely  or  wholly  reimbursed  by  the  increased 
price  which  he  hopes  to  get  for  his  land.  The  gen- 
eral practice,  too,  of  assessing  real  estate  at  a  fraction 
of  its  value,  even  though  so  universal  as  to  work  no 
actual  lessening  of  the  burden  in  any  individual 
case,  tends  to  stifle  murmurs  of  discontent.  P'or 
the  owner  secretly  congratulates  himself  on  not 
having  to  pay  on  all  of  it,  —  an  illogical  basis  for 
self-congratulation,  to  be  sure,  but  still  not  infre- 
quently effective.  The  same  person,  too,  is  not 
infrequently  the  owner  of  taxable  personal  property 
which  he  conceals,  and  he  is  less  uneasy  about  the 
tax  on  real  estate  so  long  as  he  is  able  to  save  the 
other. 


202         INTRODUCTION-   TO  PUBLIC  FINANCE     part  ii 

Another  reason  for  the  absence  of  a  concerted 
movement  of  real  estate  owners  to  lessen  the  burden 
arises  from  the  fact  that  the  real  estate  tax  is  a 
real  burden  on  the  property,  and  shifts  itself  by  the 
The  tax  on  proccss  of  Capitalisation.  For  the  new 
reaiesmehe-    pupci^^ser  s^cts  his  property  at  a  lower 

comes  a  rent        ^  ^  l       r        j 

charge.  price  than  he  would  have  to  pay  if  the 

tax  had  not  been  imposed.  The  frequency  and 
ease  with  which  real  estate  changes  hands  gives  con- 
stant occasion  for  this  capitalisation  of  the  tax. 
Every  real  tax,  when  not  a  part  of  a  well-organised 
system  which  taxes  every  kind  of  property  or  all 
receivers  of  wealth,  can  be  shifted  in  this  way.  It 
becomes  a  rent  charge  on  the  property  to  which  it  is 
thus  attached.  A  dim  perception  of  this,  and  a  possi- 
ble realisation  of  the  fact  that  a  reform  of  the  tax 
system  might  transform  this  tax  into  an  actual 
burden  again,  may  lie  at  the  bottom  of  the  indiffer- 
ence with  which  the  average  landowner  views  pro- 
posed reforms. 

All  of  this  selfish  indifference  is,  of  course,  mis- 
taken. It  defeats  its  own  ends.  The  burden  of 
taxation  is  only  light  when  properly  adjusted  to  all 
the  shoulders.  The  serious  effects  of  an  unjust, 
unequal,  and  ill-arranged  system  of  taxes  upon  the 
economic  forces  of  the  country  has  been  treated  else- 
where. The  property  tax  forms  the  subject  of  a 
special  chapter. 

We  have  spoken  merely  by  courtesy  of  an  Ameri- 
can si/stem.     As  a  matter  of  fact  there  is  none  that 


CHAP.  V     THE   DEVELOPMENT  OF  TAX  SYSTEMS    203 

is  worthy    of  the    name.       Federal   authorities   tax 
witli   no   reference   to  commonwealths  and  munici- 
palities ;  commonwealths   and   municipalities,    with- 
out reference  to  federal  action.      Municipal   taxes 
are,  however,  generally  adjusted  to  the  Entire  ab~ 
existing  commonwealth  taxes,  but  only  senceof 
in  such  a  way  as  not  to  make  the  result-  *^*  ^' 
ing  burden  appear  too  large.     Their  efforts  in  this 
direction  have  only  served  to  intensify  the  existing 
inequalities. 


CHAPTER  VI 

EXCISES 

Section  1.  Generally  speaking,  indirect  taxes  are 
older  than  direct  taxes.  They  are  suitable  to  a 
more  primitive  organisation  of  society.  Hence,  it 
will  not  be  amiss  to  treat  them  before  we  analyse 
the  direct  taxes.  By  far  the  larger  part  of  the 
Cam  arison  i^^^^^ct  taxcs  are  on  consumption  (Auf- 
■of  excises  and  wandsteueTYi) .  Most  of  the  taxes  ou  cou- 
oms.  sumption  fall  under  one  or  the  other  of 

two  heads  :  they  are  either  excises  or  customs  duties. 
In  the  United  States  the  excises  are  called  internal 
.revenue  taxes,  t  Excises  may  be  defined  as  all  those 
taxes  levied  within  a  country  on  commodities  des- 
tined for  consumption.  'Customs  duties  fall  on  com- 
modities as  they  enter  or  leave  the  country.  In  their 
effect  on  the  economic  condition  of  the  country  and 
on  the  tax-bearer  they  are  practically  the  same.  In 
both  cases  the  persons  who  first  advance  the  taxes 
are  generally  supposed  to  reimburse  themselves  from 
the  persons  to  whom  the  wares  are  sold.  In  both 
cases,  although  less  often  in  the  case  of  excises, 
it  may  be  true  that  only  a  part  of  the  funds  taken 
from  the  tax-bearer  flows  into  the  treasury.  For 
both  of  them  enable  producers  who  escape,  or  whom 

204 


CHAP.  VI  EXCISES  205 

it  is  not  intended  to  tax  (as  the  home  producer  in 
the  case  of  a  tax  on  imported  commodities),  to  collect 
on  each  piece  of  goods  sold  a  bounty  or  a  tax  in  the 
form  of  a  price  higher  than  he  could  otherwise  ob- 
tain, the  amount  of  which  goes  into  his  own  pocket. 
Sometimes  this  subsidising  of  certain  producers  is)^ 
Mitentional,  sometimes  only  accidental.  In  any  case 
the  ultimate  effects  which  will  result  from  such  an 
interference  with  the  ordinary  currents  of  trade  can- 
not be  fully  traced.  It  is  comparatively  seldom  that 
excises  have  been  intentionally  used  to  change  the 
movement  of  economic  life.  But  customs  duties 
have  regularly  been  used  for  that  pur-  Excises  ham  \ 
pose.    Excises  have,  to  be  sure,  been  used  sometimes 

.  been  used  for 

to  influence  social  life,  to  lessen  the  con-  ^^^^^  ^g_ 
sumption  of  certain  commodities  the  use  forms. 
of  which  is  regarded  as  injurious  to  the  individual 
or  dangerous  to  society,  but  the  object,  in  that  case, 
is  social,  not  economic. 

There  used  to  be  a  large  number  of  the  so-called 
direct  consumption  taxes.     A  few  of  these  still  sur- 
vive.    They  are  direct  in  the  first  sense  ^^.^^^^  ^^^ 
of   that   term,   but   not   in   the    second,   sumption 

,  ,  ..  taxes. 

These  direct  taxes  on  consumption  are 
either  remnants  of  the  older  taxes  on  movables,  or 
arose  from  the  attempt  to  frown  on  the  use  of  luxu- 
ries. They  differ  from  excises  in  that  they  areV^ 
levied  directly  on  the  consumer  and  not  on  the  per- 
son or  persons  who  supply  him  with  the  commodities. 
They  are  to-day  few  in  number  and  of  little  fiscal 


206         INTRODUCTION  TO   PUBLIC  FINANCE     part  il 

importance.  The  chief  instances  in  modern  times 
and  the  most  universal  are  the  dog  taxes.  There 
are,  in  England,  similar  taxes  on  guns,  carriages, 
armorial  bearings,  and  men  servants.  In  the  United 
States  watches,  clocks,  and  firearms  have  been  made 
contributory  in  this  way.  Plate,  houses,  clocks,  hair 
powder,  and  a  great  many  other  articles  have  been 
taxed.  It  is  regarded  as  just  and  proper  to  make 
articles  of  luxury  the  subjects  of  taxation  because 
their  use  is  supposed  to  be  evidence  of  ability  to  pay. 
The  tendency  now  is  to  leave  the  administration  of 
direct  consumption  taxes  to  the  local  bodies.  They 
are  sometimes  combined  with  police  regulative  laws 
and  are  assessed  as  a  means  of  enforcing  those  ordi- 
nances. This  is  the  case  with  the  dog  tax  in  America. 
Sec.  2.  It  is  the  excise  tax  in  all  its  forms  that 
has  displaced  the  direct  consumption  taxes.  The 
distinguishing  feature  of  this  tax  is  that  some  resi- 
dent seller  of  an  article,  whether  produced  in  the 
country  or  abroad,  or  the  manufacturer  of  such  an 
Same  excises  article,  advanccs  the  tax  either  during 
have  the  same    ^^iQ  proccss  of  its  production  or  at  some 

purpose  as  ^ 

sumptuary  time  before  it  reaches  the  consumer. 
laws.  rpj^g  main  purpose    of   the   excise   is   to 

obtain  revenue,  but  the  ideas  underlying  the  sump- 
tuary laws,  and  the  desire  to  use  taxation  as  a  means 
of  social  and  moral  reform,  have  dictated  some  of 
these  taxes  or  at  least  the  selection  of  the  commodi- 
ties to  be  taxed.  The  fact  that  the  consumption  of 
certain  articles  like  spirituous  liquors,  tobacco,  and 


CHAP.  VI  EXCISES  207 

playing  cards  is  condemned  in  itself,  and  that  such 
articles  are  regarded  as  unnecessary  luxuries,  has  led 
governments  to  disregard,  or,  indeed,  to  favour,  the 
repressive  tendency  of  the  tax  upon  the  use  of  them. 
It  is  felt  that  in  case  the  tax  should  lessen  the  con- 
sumption, the  gain  to  the  community  in  moral  and 
social  well-being  would  more  than  offset  the  loss  to 
the  treasury  in  revenue.  Moreover  the  consumption 
of  such  articles  is  not,  it  has  been  found,  liable  to 
serious  diminution  on  account  of  the  tax,  unless,  as  in 
the  case  of  the  French  tax  on  tobacco,  it  is  very  high. 
In  the  seventeenth  century  there  was  a  marked 
tendency  to  multiply  excise  taxes.  So  strong  did 
this  tendency  become  that  not  a  few  able  writers 
advocated  a  general  excise  as  the  most  An  exclusive 
iust  form  of  tax.i     Many  of  the  recent  'y'^^ofex. 

•'  ^  cise  taxes 

suggestions  for  the  reform  of  taxation  in  would  be  un- 
France  are  in  the  same  direction.  This  ^"*^' 
tendency  can  be  easily  explained  by  the  rapid  multi- 
plication of  taxable  commodities.  It  was  urged 
that  the  ease  with  which  such  taxes  were  shifted 
insured  in  the  end  perfect  justice.  It  was  also 
often  urged  that  consumption  is  more  or  less  volun- 
tary, and  any  one  who  finds  the  tax  too  heavy  can 
avoid  it  or  lessen  it  by  curtailing  his  consumption  of 
the  taxed  article.  Thus  if  the  taxed  articles  are  not 
important  necessities,  the  contributor  has  a  certain 
control  over  his  share  of  the  tax  and  can  suit  it  to 
his  means.  If  the  tax  is  on  a  luxury,  he  has  presum- 
1  Cf.  Cohn,  p.  336  ;  Seligman,  Shifting  and  Incidence,  p.  12  ff 


208         INTRODUCTION    TO   PUBLIC  FINANCE     part  n 

ably  absolute  control  over  his  contribution.  But 
modern  investigations  into  the  character  of  distribu- 
tion and  consumption  would  seem  to  indicate  that 
these  views  are  erroneous.  There  is  no  doubt  that 
consumption  is  a  very  poor  criterion  of  tax-paying 
ability.  What  a  man  spends  is  no  indication  of  his 
tax  faculty.  There  are,  also,  some  important  admin- 
istrative difficulties.  The  yield  of  these  taxes  is 
An  exclusive  bcyoud  the  coutrol  of  the  fiscal  officers. 
system  of  ex-     j£  ^^qj,q  revenues  are   needed,  it  is  not 

cises  inexpe- 
dient, always  possible  to  obtain  them  by  rais- 
ing the  rates,  since  a  rise  in  the  rate  may,  in  fact, 
lessen  the  revenues  by  lessening  the  demand  for  the 
articles.     Therefore,  they   are   not  variable   at   the 
pleasure  of  the  treasury.     It  follows,  further,  that  a  I 
system  of  excises  alone  would  be  extremely  inelastic.  P 
But   as   parts   of  a  system,  the  elasticity  of  which 
is  provided  for  by  other  elements,  they  have  proved 
very    valuable   on    account   of   the    relative  ease  of 
^,    ,  .  collection,  and  the  lar^e  returns   which 

Used  %n  con-  '  ° 

nectionwith  they  cau  be  made  to  yield.  In  England, 
other  taxes.  j^^ggia,  and  France  the  returns  of  the 
excises  and  customs  duties  are  one-half,  or  more 
of  the  national  revenues.  In  Germany  the  consti- 
tution confers  upon  the  Imperial  legislature  the 
[)ower  to  regulate  the  customs  and  excises  upon 
domestic  productions  of  salt,  tobacco,  spirituous 
liquors,  beer,  sugar,  and  syrup. ^  The  common- 
wealths of  the  Empire  do  not  levy  excises  on  the 
1  Burgess,  Political  Science,  II.,  p.  174. 


CHAP.  VI  EXCISES  209 

articles  above  mentioned  except  Bavaria,  Wiirtem- 
berg,  and  Baden.  The  "Empire  cannot  tax  any  other 
articles.  In  the  United  States  the  federal  govern- 
ment derives  nearly  half  its  revenues  from  excises 
and  an  almost  equal  amount  from  customs.  H. 

The  following  principles  have  been  developed 
as  governing  the  returns  obtainable  from  excises: 
(1)  Articles  which  are  regarded  as  neces-  Excises  on 
saries,  and  which  naturally  have  or  can  necessaries. 
have  a  wide  consumption,  are  very  suitable  under 
this  tax  for  obtaining  large  revenues.  In  this  case 
the  operation  of  the  tax  is  like  that  of  a  poll  tax. 
The  old  French  gahelle,  a  tax  on  salt,  is  an  example. 
The  effect  of  these  taxes,  if  high,  is  possibly  to  cur- 
tail consumption  and  possibly  to  cause  a  substitution 
of  other  similar  articles  not  taxed.  Possibly,  too, 
they  may  curtail  the  consumption  of  other  articles  by 
lessening  the  money  available  for  their  purchase. 
But  even  with  a  low  rate,  these  taxes  are  extremely 
productive  of  revenue,  on  account  of  the  large  number 
of  contributors.  The  objection  to  burdening  neces- 
saries and  rendering  the  existence  of  the  poor 
harder,  leads,  however,  sooner  or  later,  to  their  abo- 
lition or  to  a  reduction  in  their  rates.  These,  like 
the  poll  taxes,  recognise  to  too  small  an  extent  dif-V 
ferences  in  ability.  They  are,  however,  Exdses  on 
good  sources  of  revenue  in  cases  of  ex-  luxuries  and 

.  1  r     i.      comforts. 

treme  need.     (2)  Luxuries  and  comtorts 

may  be  taxed   heavily.     This  applies  especially   to 

luxuries  the  use  of  which  has  become  a  fixed  habit 


210         INTRODUCTION   TO  PUBLIC  FINANCE     part  il 

with  large  masses  of  people.  The  general  principle 
is  to  select  those  luxuries  of  the  widest  consumption  J 
as  the  objects  of  the  heaviest  taxes.  Thus  alcoholic 
liquors  and  tobacco  are  universally  taxed  in  this 
way.  In  the  United  States  they  form  almost  the 
sole  objects.  In  times  of  special  need  it  is  customary  / 
to  press  the  semi-luxuries  or  comforts  into  service. 
Here  again,  the  choice  is  made  of  articles  of  widest 
consumption  ;  such  as  coffee,  sugar,  silks,  chocolate, 
etc.  In  most  modern  excise  systems,  the  heaviest 
burden  falls  upon  luxuries.  In  England,  where  the 
receipts  from  excises  are  nearly  one-fourth  of  the 
total  revenues,  the  chief  burden  falls  upon  spirits 
(1908,  £22,830,000)  and  beer  (1908,  £13,550,000). 
In  France,  aside  from  the  octroi^  the  chief  excises 
are  on  beer,  wine,  spirits,  and  tobacco,  then  on  sugar, 
salt,  and  playing  cards.  In  Germany,  apart  from 
the  city  gate  taxes,  they  fall  upon  alcoholic  drinks, 
tobacco,  and  sugar.  There  are  special  difficulties 
which  Germany  encounters  in  the  administration  of 
these  taxes,  due  to  deep-seated  historical  prejudices 
on  the  part  of  the  commonwealths  of  the  Empire. 
Modern  excises  are,  then,  mainly  taxes  on  alcoholic  '\ 
drinks  and  tobacco  with  the  addition  of  a  few  other 
>duties  upon  playing  cards,  etc.,  and  in  cases  of  great 
need,  upon  a  few  articles  of  large  consumption. 

Sec.  3.  By  far  the  most  interesting  features  of 
Methods  of  the  excises  are  the  methods  of  assess- 
assessment.  ment  and  collection.  These  are  practi- 
cally of  three  kinds,  which  may  be  variously  combined; 


CHAP.  VI  EXCISES  211 

(1)  A  tax  on  the  producer  or  seller  so  levied  that 
'the  failure  to  pay  it  deprives  the  person  of  the  right 
to  sell,  and  renders  him  liable  to  penalty.  That  isX 
a  so-called  license^  is  sold.  (2)  An  impost  on  eachV 
unit  of  the  article.  This  demands  the  registration  ^ /^^ 
of  the  dealers  therein ;  and  sometimes  they  are  re- 
quired to  give  bonds  as  surety  for  the  payment  of 
the  tax.  Wherever  it  is  possible,  this  impost  is 
collected  by  means  of  the  sale  cf  stamps  purchased 
of  the  government  to  be  affixed  to  each  package, 
hogshead,  etc.,  or  by  means  of  brands,  or  other  marks 
affixed  by  officials  who  thus  receipt  for  the  payment. 
The  stamp  or  brand  serves  as  evidence  that  the  tax 
has  been  paid.  Goods  not  bearing  these  would,  if 
taxable,  become  contraband  and  liable  to  seizure. 
(3)  By  the  retention  of  the  monopoly  of  manufac- 
ture and  sale  by  the  government. 

England  and  America  use  a  combination  of  (1) 
and  (2).  Thus  in  England  every  barrel  of  beer  is 
taxed  Is,  M.  (1908)  and  every  dealer  and  brewer  pays 
a  license  besides. ^ 

1  For  the  distinction  between  a  license  and  a  permit  see  the 
United  States  Census  Bureau  definitions  cited  in  the  Appendix  to 
Chap.  I.  of  Fart  II.  of  this  work.  A  license  to  conduct  some  busi- 
ness illegal  in  itself  differs  from  a  license  required  merely  to  com- 
pel the  payment  of  a  tax. 

2  The  following  applies  to  1908  : 

Beer  Duty,  Excise  ^  ^   ^ 

Beer  of  specific  gravity  of  1055  degrees,  per  36  gal.    .     .    0    7    9 
Annual  Licenses 

Brewers  of  beer  for  sale ....     1    w 

Other  brewers  : 
Brewing  solely  for  their  own  domestic  use,  exempt 


212         INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 

In  the  United  States  all  internal  revenue  taxes 
are  payable  by  stamps.  These  stamps  are  pasted 
upon  the  packages  containing  the  taxed  commodi- 
ties in  such  a  way  as  to  be  necessarily  broken  when 
the  package  is  opened.     Or  else  they  are  pasted  up 

from  beer  duty,  if  the  annual  value  of  the  house  oc-  £  s.  d. 

cupied  does  not  exceed  £8 (exempt) 

Same,  if  annual  value  of  house  exceeds  £8,  but  does  not 

exceed  £10 040 

Same,  if  annual  value  £10  to  £15 0    9    0 

Same,  but  liable  also  to  beer  duty,  over  £15    .     .     ..040 
Same,  or  for  consumption  by  farm  labourers,  if  annual 
value  of  house  does  not  exceed  £10,  exempt  from 

beer  duty 040 

Same  as  last,  if  over  £10,  liable  also  to  the  beer  duty  .040 

Beer  dealers 361 

Beer  dealers,  additional  to  retail,  off  the  premises  ...     1     5    0 

Beer  retailers,  on  the  premises 3  10    0 

Beer  retailers  "on,"  occasional  (license  per  day)   ...010 
Beer  retailers, grocers,  "off,"  Scotland,  to  £10.     ...     2  10    0 
Beer  retailers,  grocers,  "  off,"  Scotland,  £10  and  up- 
ward   4    4    0 

Beer  retailers,  grocers,  "  off,"  England 15    0 

With  varying  and  additional  licenses  for  combination 
of  sale  of  beer  with  wine,  spirits,  etc. 
Spirits  are  taxed  in  a  similar  way  and  so  are  the  dealers  therein. 
In  the  case  of  tobacco  the  import  duty  forms  the  tax  on  the  com- 
modity, and  the  manufacturer  pays  a  license  graded  according  to 
the  size  of  his  business. 
Tobacco  manufacturers  : 

£   s.  d. 

Under         20,000  lb 5    5  0 

20,000  to    40,000   " 10  10  0 

40,000  "    60,000   '» 15  15  0 

60,000  "    80,000   " 21     0  0 

80,000  "  100,000   " 26    5  0 

100,000 31  10  0 


CHAP.  VI  EXCISES  213 

or   exposed   in    the   places   of  business.     The  table 
below   illustrates  the  whole  system. 

Schedule  of  articles  and  occupations  subject  to  tax  under  the 
internal  revenue  laws  of  the  United  States  in  force  August  28, 
1894,  as  amended  to  1908. 

Special  Taxes 

Rate  of  tax 

Rectifiers  of  less  than  500  bbl.  a  year 1100.00 

Rectifiers  of  500  bbl.  a  year,  or  more 200.00 

Retail  liquor  dealers 25.00 

Wholesale  liquor  dealers 100.00 

Retail  dealers  in  malt  liquors 20.00 

Wholesale  dealers  in  malt  liquors 50.00 

Manufacturers  of  stills 50.00 

And  for  stills  or  worms,  manufactured,  each    ....  20.00 

Brewers,  annual  manufacture  less  than  500  bbl.  .    .    .  50.00 

Brewers,  annual  manufacture  500  bbl.,  or  more     .    .    .  100.00 

Manufacturers  of  oleomargarine 600.00 

Retail  dealers  in  oleomargarine 48.00 

Wholesale  dealers  in  oleomargarine 480.00 

Distilled  Spirits,  etc. 

Distilled  spirits  per  gallon $  1.10 

Wines,  liquors,  or  compounds  known  or  denominated  as 
wines,  and  made  in  imitation  of  sparkling  wine  or  cham- 
pagne, but  not  made  from  grapes  grown  in  the  United 
States,  and  liquors,  not  made  from  grapes,  currants,  rhu- 
barb, or  berries  grown  in  the  United  States,  but  produced 
by  being  rectified  or  mixed  with  distilled  spirits,  or  by  the 
infusion  of  any  matter  in  spirits  to  be  sold  as  wine,  or  as 
a  substitute  for  wine,  in  bottles  containing  not  more  than 
one  pint,  per  bottle  or  package 10 

Same,  in  bottles  containing  more  than  one  pint,  and  not 
more  than  one  quart,  per  bottle  or  package 20 

And  at  the  same  rate  for  any  larger  quantity  of  such  mer- 
chandise, however  put  up,  or  whatever  may  be  the  package. 

Stamps  for  distilled  spirits  intended  for  export,  for  ex- 
pense  10 


214        INTRODUCTION  TO  PUBLIC  FINANCE     part  il 
Tobacco  and  Snuff 

Rate  of  tax 
Tobacco  and  snuff,  however  prepared,  manufactured,  and 
sold,  or  removed  for  consumption  or  sale,  per  pound  12 
cents,  or  with  discount  of  20  per  cent  ....     $  .09  ^  net 


Cigars  and  Cigarettes 

Cigars  of  all  descriptions  made  of  tobacco  or  any  substi- 
tute therefor,  and  weighing  more  than  3  lb.  per  thou- 
sand        13.00 

The  same,  weighing  not  over  3  lb.  per  thousand,  per  thou- 
sand       54 

Cigarettes,  weighing  not  more  than  3  lb.  per  thousand  and 
of  a  wholesale  value  or  price  of  more  than  $2  per  thou- 
sand, 36  cents  per  pound,  or  per  thousand 1.08 

The  same  of  a  wholesale  value  or  price  of  not  more  than 
$2  per  thousand,  18  cents  per  pound,  or  per  thousand  .     .54 

Cigarettes,  weighing  more  than  3  lb.  per  thousand,  per 
thousand 3.60 

Fermented  Liquors 

Fermented  liquors,  per  barrel,  containing  not  more  than  31 
gal 11.60 

More  than  1  bbl.  and  not  more  than  1  hogshead,  63  gal., 
in  one  package 3.20 

Oleomargarine 

Domestic,  per  pound $  .02 

Imported,  per  pound 15 

Opium 
Prepared  smoking  opium,  per  pound $10.00 

Playing  Cards 

Playing  cards,  per  pack,  containing  not  more  than  54 
cards $  .02 


I 


CHAP.  VI  EXCISES  215 

Sec.  4.  We  may  now  look  at  a  few  characteristic 
excises.  The  taxation  of  salt  by  means  of  an  ex- 
cise, collected  in  the  form  of  a  tax  on 
producers,  a  tax  on  sellers,  the  sale  of  a 
monopoly  to  a  private  company,  or  state  manufac- 
ture, is  one  of  the  oldest  forms  of  taxation.  On  ac- 
count of  the  nature  of  the  commodity,  a  necessity  for 
which  there  is  no  substitute,  and  of  which  poor  and 
rich  consume  about  the  same  amount,  this  tax  acts 
practically  as  a  poll  tax.  With  the  modern  tendency 
to  abolish  or  at  least  to  lower  poll  taxes,  as  unequal 
and  unjust,  the  salt  tax  has  been  largely  abolished, 
or  its  rates  have  been  so  lowered  as  to  practically 
nullify  the  returns.  France  in  1908  received  about 
10,000,000  francs  from  the  salt  excises.  The  P]ng- 
lish  salt  tax  yielded  at  the  time  of  its  abolition  only 
<£ 380,000.  The  United  States  war  excise  upon  salt 
yielded  only  1300,000. 

The  best,  but  not  by  any  means  the  sole,  example  of 
the  tobacco  monopoly  is  in  France.  This  interesting 
tax  scheme  began  in  1674  under  Colbert.  It  contin- 
ued with  slight  interruptions  for  over  a  century  as  one 
of  the  most  productive  parts  of  the  rev- 

^  -.  ^    ,  fl  French  tobac- 

enue  system.  It  was  leased  to  a  jerme  ^^  monopoly. 
gSnSrale,  who  paid  the  government,  at  the 
time  of  Necker,  32,000,000  francs  annually.  At 
the  time  of  the  Revolution  the  monopoly  was  abol- 
ished, and  an  attempt  was  made  to  introduce  a  series 
of  taxes  on  tobacco.  But  the  monopoly  was  restored 
in  1810  by  Napoleon  I.,  and  has  continued  ever  since. 


216         INTRODUCTION   TO  PUBLIC  FINANCE     part  il 

Under  the  present  law  the  culture  of  the  plant  is 
forbidden  outside  of  certain  localities.  Each  year 
the  estimated  amount  required  by  the  depart- 
ment is  apportioned  among  the  different  applicants 
within  the  district  where  it  is  permitted  to  raise 
tobacco.  Several  thorough  official  inspections  of  the 
fields  and  crops  are  made,  and  even  the  number  of 
plants  and  leaves  is  counted  to  insure  obedience 
with  the  regulation  which  demands  the  delivery  of 
the  whole  crop  to  the  government.  Tobacco  raised 
for  export  is  similarly  watched  to  see  that  none  of  it 
escapes  into  the  channels  of  the  French  trade.  The 
price  for  each  quality  is  determined  by  a  commission 
of  officials  and  experts.  A  part,  about  one-half,  of 
the  supply  is  imported.  The  manufacture  is  carried 
on  in  public  factories,  which  employ  about  20,000 
workmen.  The  sale  is  in  the  hands  of  some  40,000 
petty  officials,  who  receive  a  percentage  of  their 
sales  and  whose  appointment  is  a  part  of  the  party 
spoils  system.  The  revenues  obtained  in  this  way 
are  enormous : 

1815 40,000,000  francs. 

1869 197,000,000  " 

1872 218,700,000  « 

1876 262,300,000  « 

1880 284,000,000  « 

1885 300,000,000  " 

1890 373,000,000  « 

1895 381,000,000  « 

1900 415,000,000  « 

1904 447,000,000  « 

1908  with  matches 516,000,000  « 


CHAP.  VI  EXCISES  217 

The  prices  charged  for  tobacco  are  high  compared 
with  the  prices  prevalent  in  other  countries,  so  high 
that  the  consumption  is  apparently  checked  thereby, 
it  being  per  capita  less  than  one-half  that  of  Ger- 
many. Austria  and  Italy  have  very  similar  state 
tobacco  monopolies.  France  added  a  monopoly  on 
matches  in  1890. 

Sec.  5.  On  account  of  the  large  returns  obtain- 
able from  an  excise  on  luxuries,  and  in  view  of  the 
fact  that   any  repressive   effect  of  such  ^, 

^         ^  The  proper 

excises  is  not  felt  to  be  harmful,  but  is  field  for 
often  desired,  it  is  probable  that  these  ^^^**^®- 
taxes  will  be  long  retained.  They  are  applicable  to 
any  luxury  the  consumption  of  which  is  large  and 
of  which  the  production  is  sufficiently  simple  or  con- 
centrated to  allow  of  supervision.  But  in  general, 
excises  as  taxes  on  expenditure  or  consumption  are 
unfair.  What  a  man  spends  is  no  indication  of  his 
ability  to  pay  taxes,  and  what  a  man  spends  on  a 
certain  limited  list  of  commodities  is  less  so.  When 
these  taxes  are  made  a  subordinate  part  of  a  system 
and  due  allowance  is  made  in  the  other  taxes  for  the 
existing  burdens,  there  is  less  objection  to  them. 


CHAPTER  VII 

CUSTOMS  DUTIES 

Section  1.  Customs  duties  are  taxes  levied  upon 
commodities  when  tliey  cross  the  national  boundary 
Customs  line,  or  are  admitted   within  a  customs 

duties  defined,  territory,  consisting  of  a  combination 
of  countries  or  of  definitely  limited  parts  of  coun- 
tries. Unless  a  cit}^  or  town  forms  an  independent 
sovereignty,  taxes  levied  on  goods  entering  a  city 
are  not  called  customs  duties,  but  octrois  or  imposts, 
and  partake  of  the  nature  of  excises.  Duties  upon 
goods  passing  from  province  to  province  in  the  same 
country  are  likewise  not  customs  duties  ;  neither 
are  tolls  or  transit  duties  charged  upon  goods  pass- 
ing through  the  country.  Such  charges  are  fees 
for  the  ostensible  or  real  service  of  the  government 
in  keeping  up  roads  and  bridges,  maintaining  peace, 
and  allowing  transit.^  Customs  duties  are  indirect 
consumption  taxes  of  practically  the  same  charac- 
ter as  excises.  Their  treatment  in  a  separate  chap- 
ter is  not  on  account  of  any  actual  difference  in 

^  Cf.  Bastable,  p.  552,  for  contrary  view.  Bastable  does  not 
recognise  fees  as  a  separate  class.  Hence  his  identification  of 
transit  duties  with  customs  duties. 

218 


CHAP.  VII  CUSTOMS  DUTIES  219 

nature   but    because    of   their   historical   and   fiscal 
importance. 

Sec.  2.     The  oldest  forms  of  customs  duties  were 
on  exports  and  imports  alike.     They  arose  by  anal- 
ogy from  the    transit  tolls    which   were  Old  customs 
customary   in   the   middle   a^es.      Once  ^^^^^^  <'<'^^red 

°  both  imports 

in  use  their  fiscal  importance  was  recog-  andexpoHs. 
nised,  and  it  was  easy  from  the  standpoint  of  feudal 
politics  to  justify  their  continuance.  Feudalism  re- 
garded every  act  of  the  vassal  as  the  concern  of  the 
lord.  If  any  vassal,  or  later  any  subject,  found  a 
new  means  of  gain,  feudalism  imposed  on  him  the 
duty  of  contributing  a  part  thereof  to  the  lord  or 
the  king.  If  a  subject  sold  a  commodity  to  a 
foreigner  it  seemed  to  the  men  of  the  middle  ages 
that  the  king's  interests  were  affected,  and  it  seemed 
right  that  his  permission  should  be  paid  for.  The 
export  duty  is  often  a  sort  of  compromise  accepted 
for  the  removal  of  the  prohibition  of  exportation. 
With  the  decay  of  the  older,  cruder,  mercantile  ideas 
and  the  advent  of  a  period  when  national  wealth 
came  clearly  to  depend  upon  the  size  of  national 
trade  more  than  on  its  direction,  export  duties  fell 
away.  It  is  interesting  to  note  in  this  connection 
that  England  has  been  using,  even  in  very  recent 
years,  an  export  duty  on  coal,  originally  for  the  pro- 
tection of  her  deposits  from  depletion.  The  fall  of  ex- 
In  1901  this  duty  was  restored  in  order  vortdvOes. 
to  obtain  revenues  for  warpurposes.  The  yield  in 
1905  reached  £2,500,000.     The  duty  was  repealed  in 


220        INTRODUCTION  TO  PUBLIC  FINANCE      part  il 

1906.  Turkey  and  India  are  now  the  only  countries 
wliere  export  duties  form  an  important  item  of 
revenue.  India  is  the  only  country  in  which  the 
export  duties  exceed  the  import  duties. ^  In  Tur- 
key the  duty  is  1  per  cent  of  all  exported  com- 
modities. Switzerland,  Austria,  Russia,  and  Italy 
have  a  few  export  duties  upon  products  peculiar 
to  their  soil,  the  burden  of  which  is  supposed  to 
fall  upon  the  foreigner.  France  did  away  with  them 
in  1881,  Germany  in  1873. 

Import  duties  are  still  very  numerous.  As  a 
branch  of  the  taxes  on  consumption,  their  yield  is 
very  large.  The  German  customs  duties  yield  nearly 
one-half  of  the  imperial  net  receipts.  Until  recently 
about  half  of  the  United  States  federal  income 
was  from  this  source ;  now  it  is  slightly  less  in  pro- 
portion. The  English  customs  duties  yield  about 
23  per  cent  (1908)  of  the  gross  receipts,  the  French 
15  per  cent,  and  the  Italian  the  same. 

Sec.  3.  Although  the  fiscal  interests  are  great, 
yet  in  every  important  country  except  England  the 
receipts  from  this  source  are  not  regarded  as  of  any 
greater  importance  than  the  effects  upon  the  indus- 
tries of  the  country.  There  are  then  two  sides  from 
which  these  taxes  must  be  studied:  (1)  from  the 
side  of  the  revenue-yielding  capacity  ;  (2)  from  the 
side  of  the  "  protection  "  afforded  the  industries  of 

1  Export  duties  are  still  levied  in  the  Philippines  and  are  regarded 
as  necessary  for  the  taxation  of  the  industries  of  the  islands.  They 
fall  on  sugar,  hemp,  and  tobacco  principally. 


CHAP.  VII  CUSTOMS  DUTIES  221 

the  country  which  levies  them.  While  it  would  be 
undesirable  to  introduce  a  full  discus-  The  pur-poses 
sion  of  the  far-reaching  economic  effects  ^f  the  customs 

„  ,       i  •  1     i  •  .     -1  duties  both  iis- 

of  protective  duties  upon  industries  cai  and  poiiti- 
and  commerce  in  a  treatise  on  finance,  *^^^- 
yet  a  brief  statement  of  these  effects  and  of  the  main 
reasons  which  have  led  great  nations  to  adopt  these 
taxes  is  essential  to  an  understanding  of  tlieir  na- 
ture. It  is  as  essential  to  know  how  and  why  protec- 
tive duties  are  intended  to  alter  the  existing  economic 
conditions,  as  it  is  to  know  how  and  why  the  income 
tax,  for  example,  is  supposed  to  leave  then)  unaltered. 
Sec.  4.  What  is  the  distinction  between  a  protec- 
tive tariff  and  a  tariff  for  revenue  ?  It  may  be 
briefly  stated  as  follows  :  a  protective  Protective  tar- 
tariff  is  a  scale  of  duties  so  arranged  as  ^ff^^M^d. 
to  prevent  importation,  wholly  or  in  part,  and  to 
raise  the  price  of  commodities  from  abroad,  the  pro- 
duction of  which  within  the  country  it  is  intended 
to  encourage.  The  scale  of  duties  is  therefore 
arranged  with  a  view  to  the  supposed  needs  of  the 
industries  which  it  is  intended  to  develop.  A  tariff 
for  revenue,  on  the  other  hand,  aims  to  avoid  any 
effect  upon  industries  within  the  country,  and  the 
duties  are  laid  according  to  principles  Revenue  ta rig 
similar  to  those  of  the  excise  upon  arti-  ^^fi""^"^- 
cles  of  large  consumption  and  great  tax-bearing 
capacity.  The  term  "  a  tariff  for  revenue  o/iZz^,"  so 
current  in  the  United  States,  is  the  expression,  of  an 
unattainable   hope.     A    moment's   consideration   of 


5i22         INTRODUCTION  TO  PUBLIC  FINANCE    part 


the  law  of  international  exchange,^  namely,  that  the 
interchange  of  commodities  between  distant  places  is 
determined  by  differences  in  their  possible  cost  of 
production  in  the  same  place,  and  not  by  their  ab- 
The  effect  of  solute  cost  of  production  in  the  separated 
all  customs  interchanging  places,  will  reveal  the  fact 
trade. _  that  cvcn  a  very  small  duty  upon  a  single 

commodity  affects  the  demand  of  the  country  from 
which  that  commodity  comes  for  other  things,  and 
indirectly  affects  every  commodity  manufactured  in 
the  country  laying  the  tax.  The  same  is  true  of  an 
excise.  In  fact,  any  consumption  tax  has  far-reach- 
ing effects.  Strictly  speaking,  there  can  be  no  such 
thing  as  a  tariff  for  revenue  only.  What  is  meant 
by  that  phrase  is  that  the  tariff  shall  be  so  arranged 
as  to  yield  the  needed  revenue  with  the  least  possible 
effect  on  the  trade  and  industry  of  the  country. 

It  must  be  noticed  that  every  tariff,  even  though 
it  contains  many  protective  features,  also,  necessarily 
„,    ,  contains  many  duties  which  are  mainly 

The  two  pur-  ^  -J 

poses  always  for  rcvcnue.  Thus  in  the  United  States, 
conjotne  .  Q^QTi  with  high  protective  duties,  the 
main  revenues  were  obtained  from  the  taxes  upon  a 
few  commodities.  The  receipts  in  1888,  for  example, 
were  :  from  duties  on  sugar  and  the  like,  $52,000,000  ; 
from  wool  and  woollens,  $37,000,000  ;  from  iron  and 
steel,  $21,000,000  ;  these  three  together  being  more 
than  half  the  entire  receipts  from  customs  duties. 
Sec.  5.  The  protective  principle  is  widely  applied 
1  See  Mill,  Prin.,  Bk.  III.,  Chap.  XVII. 


1 


CHAP.  VII  CUSTOMS  DUITES  223 

in  every  important  existing  tariff  of  customs  outside 
of  England,  Holland,  Norway,  Belgium,  Switzerland, 
and  Denmark.  This  policy  is  clearly  the  outcome 
of  national  selfishness.  The  attempt  to  direct  in- 
dustry into  certain  lines  by  artificial  means  cannot 
find   support  in  any  system  of   political   „ 

Protection  as 

economy  that  regards  the  largest  possible  a  national 
world's  product  as  the  proper  aim.i  P^^^^^y- 
The  object  is  rather  the  greatest  possible  diversity 
of  home  products.  In  so  far  as  this  purpose  is 
attained,  it  is  by  the  process  of  shutting  out  com- 
petition and  allowing  the  home  producer  to  collect 
from  home  consumers  a  certain  amount  of  support, 
greater  or  less,  according  to  the  supposed  needs  of 
the  producer  in  question.  In  so  far,  then,  the  actual 
production  afforded  is  an  item  of  public  expenditure. 
Revenues  collected  by  means  of  higher  prices  author- 
ised by  law  are  spent  in  developing  the  industry 
protected.  It  is  in  every  respect  the  same  as  if  a 
subsidy  were  paid  to  the  manufacturer  or  other  pro- 
ducer, except  that  the  money  goes  directly  to  him 
without  first  passing  through  the  treasury. ^ 

1  See  the  article  by  Professor  Folwell  on  "Protective  Tariffs  as 
a  Question  of  National  Economy,"  in  The  National  Bevenues,  a 
collection  of  papers  by  American  economists,  edited  by  Albert 
Shaw,  Chicago,  1888.  Contrary  to  the  popular  opinion  as  to  the 
views  of  economists,  none  of  the  writers  who  have  contributed  to 
this  symposium  finds  it  possible  to  attack  protection  on  a  priori 
grounds.  On  the  free-trade  side  see  Report  of  the  Proceedings  of 
the  International  Free-trade  Congress,  London,  August,  1908. 
Cobden  Club,  Caxton  House,  Westminster,  Sw.  London,  1908. 

2  See  above  on  expenditure  for  protection  of  industry. 


224         INTRODUCTION   TO  PUBLIC  FINANCE    part  n 

Sec.  6.  We  turn  now  to  a  treatment  of  the  fiscal 
character  of  protective  duties  :  (1)  In  the  first 
place,  it  is  clear  that  the  more  "  protection  "  the  duty 
gives,  the  less  will  be  the  revenues  afforded  to  the 
A  high  pro-  government',  and  the  greater  the  possible 
tective  tariff      revcuues   to    the    subsidised    producer. 

yields  little  ^ 

revenue.  Absolutc  protection  means  the  exclusion 

of  the  foreign  commodity  and  no  revenue  to  the  gov- 
ernment. The  subsidy  that  the  producer  can  obtain 
is  determined  by  the  conditions  of  production  ;  it 
varies  from  nothing  to  the  whole  amount  of  the  tax 
according  as  the  cost  of  production  varies  above 
what  the  cost  of  the  imported  commodity  would  be 
without  the  duty.  (2)  Above  a  certain  point  high 
duties  tend  to  diminish  the  revenues  to  the  govern- 
ment, and  increase  the  subsidy  to  the  producer,  by 
diminishing  the  amount  of  the  commodity  imported. 
The  point  beyond  which  the  total  revenues  diminish 
At  what  point  is  ascertainable  by  a  principle  similar  to 
yielded  t^'dt  of  charging  what  the  traffic  will  bear. 

largest  f  In  practice  that  point  can  be  ascertained 

by  gradually  increasing  the  duty  until  it  is  found 
that  the  importation  begins  to  diminish,  and  stopping 
the  increase  of  the  duty  when  it  is  found  that  the 
lidded  duty  checks  more  of  the  importation  than  the 
increased  duty  compensates  for.  A  tariff  of  customs 
The  cost  of  duties  arranged  throughout  on  this  prin- 
IZT^l^  ciple  would  be  a  revenue  tariff,  and  if 
consumer.  Universal,  would  yield  enormous  sums. 
It   would,    also,    contain    many  protective  features 


CHAP.  VII  CUSTOMS  DUTIES  225 

The  burden  of  such  a  tax  would  be  insufferable.  No 
such  general  tariff  has  ever  been  enforced.  (3)  Pro- 
tection  is  given  only  when  the  price  is  raised.  The 
subsidy  paid  to  the  producer  is  paid  by  the  consumers 
within  the  country.  This  part  of  the  tax  is  never 
shifted  to  foreigners   and   generallv   re- 

°  o  ^  Thetaxactu- 

mains   on  the  consumer.     (4)  But  that  ally  collected 
part  of  the  tax  which  flows  into  the  treas-  ^^  ^^^  ^'''^''''- 

ment  is  not 

ury  of  the  government  is  not  always,  always paidby 
although  generally,  paid  by  the  consumer,  ^^  consumer. 
whether  protection  is  afforded  thereby  or  not.  There 
are  a  few  rare  instances  in  which  the  tax  that  forms 
a  part  of  the  government's  revenue  is  shifted  either 
to  the  foreigner,  i.e.  the  producer,  or  the  speculator, 
i.e.  the  importer.  These  instructive  instances  may 
be  summed  up  as  follows :  The  consumer  escapes 
that  part  of  the  tax  which  flows  into  the  treasury  on 
purchases  of  commodities  actually  imported :  (a) 
When  the  amount  of  the  commodity  produced  in  the 
country  laying  the  tax  is  sufficient  in  quantity  to 
entirely  supply  the  home  market  and  to  fix  the  price 
very  close  to  the  cost  of  production,  while  the  for- 
eigner has  at  the  same  time  so  large  a  supply  that 
he  must  enter  that  market  to  dispose  of  it.  In  this 
case,  if  any  revenue  at  all  accrues  to  the  ^rf^gJ^  ff^g  foj.- 
government,  it  is  clear  that  it  is  paid  by  eignerpays 
the  foreigner,  who  is  burdened  by  the 
whole  tax  and  may  lose  more,  —  more,  that  is,  if  his 
entrance  into  the  market  still  further  depresses  the 
price.  The  home  producer  gets  no  subsidy.  A 
Q 


226         INTRODUCTION   TO  PUBLIC  FINANCE     part  il 

commonly  cited  example  of  this  is  the  case  of  rye  in 
Germany  in  good  years  when  the  outside  crop  is  also 
good.  (6)  When  a  new  tax  is  laid  on  goods  pro- 
The  forei  ner  ^^^^^  ^Y  ^^^  ^^^  ^^  ^  large  fixed  plant  for  a 
pays  the  tax  limited  market  which  would  be  lost  if  the 
emporart  y.  p^j^Q  were  raised.  As  long  as  the  producer 
is  unable  to  change  the  nature  of  the  plant,  he  must 
pay  the  tax.  An  example  was  found  in  the  iron 
products  from  the  Rhine  districts  prepared  for  the 
trade  as  "Sheffield"  cutlery.  England  could  in  this 
case  tax  the  foreigner  until  such  time  as  he  could 
change  the  character  of  his  product,  (c)  In  the 
case  of  commodities  that  are  used  only  as  the  substi- 
tutes for  something  else  because  cheaper,  and  which 
would  not,  if  the  price  rose  higher  than  that  of  the 
^^   ^     .  commodity  for  which  they  are  used,  be 

The  foreigner  -^  "^ 

paijs  a  part  or  cousumcd  at  all.  In  this  case  the  f  or- 
aii  of  the  tax.     g^g^j^j.  ^^^^  ^  p^j.t  or  the  wholc  of  the  tax 

when  the  alternate  commodit}^  is  cheap.  For  ex- 
ample, rye  in  Germany  when  wheat  is  cheap,  espe- 
_  .  cially  if  at  the  same  time  the  crop  of  rye 

The  foreigner  "^  .    . 

pays  a  part  of  is  short.  ((?)  In  the  case  of  commodities 
the  tax.  q^  large  part  of  whose  total  consumption 

is  produced  in  the  country,  but  not  enough  to  abso- 
lutely fix  the  price,  which  is  still  above  the  cost  of 
production.  The  foreigner  in  that  case  may  pay 
part  of  the  tax,  since  his  arrival  depresses  the  price. 
The  speculator  (0  The  Speculator  regularly  pays  the  tax 
pays  the  tax.  in  tliosc  frequently  recurring  instances 
when  the  commodity  is  massed  in  warehouses  on  the 


CHAP.  VI  CUSTOMS  DUTIES  227 

border  ready  for  importation  on  a  rise  in  the  price, 
and  on  being  imported,  at  the  order  of  various  specu- 
lators, in  large  masses  depresses  prices  again.  It  is 
a  pretty  well-established  fact,  from  the  investigations 
of  Cohn  and  Kandtorowicz,  that  the  speculators  on 
the  Exchange  as  a  whole  lose  more  than  they  gain. 
This  loss  is  in  part  the  consumer's  gain  through  the 
relief  from  taxation. ^ 

Sec.  7-  Customs  duties  regarded  merely  as  a 
source  of  revenue  depend  upon  the  same  principles 
exactly  as  those  which  underlie  excises  used  for  that 
purpose.  Tlie  greater  revenue  is  obtained  with  the 
least  expense  from  a  few  simple  duties  upon  important 
commodities. 

Technically,  customs  duties  are  of  two  kinds,  ac- 
cording as  they  are  levied  upon  goods  in  bulk  irre- 
spective of  their  value,  or  the  contrary.   Specific  and 
This  technical  distinction  is  of  great  im-  «<^  valorem 
portance  in  determining  the  incidence  of 
these  taxes.     Duties  levied  according  to  the  value  of 
the  imported  commodities  are  known  as  ad  valorem; 
those  according  to  weight,  bulk,  or   other   unit   of 
measurement    are    known    as    specific.     The   latter 
usually  fall  most  heavily  upon  the  coarser  or  cheaper 
grades  of  commodities.     Such  a  tariff  is,  therefore, 
regressive  and  contrary  to  the  spirit  of  many  con- 

1  See  the  masterly  treatment  of  the  whole  of  this  intricate  sub- 
ject by  Lexis,  "  Handel,"  in  Sch'onberg's  Handbuch,  2d  ed.,  Vol.  II., 
XXI.,  sec.  77;  also  Conrad,  in  his  Jahfhuch,  XXXVII.;  Cohn, 
"  Zeitgeschafte  und  Differenzgeschafte,"  in  Hildebrand's  Jahrbuch, 
VII.,  p.  388;    brought  down  to  date  in  1890  by  Kandtorowicz. 


228         INTRODUCTION   TO  PUBLIC  FINANCE     part  n 

sumption  tax  systems,  which  usually  tax  luxuries 
more  heavily  than  other  commodities.  But  the  great 
saving  in  expense,  and  the  great  ease  of  collecting 
and  administering  specific  duties,  go  a  long  way  in 
recommending  them.  Ad  valorem  duties  demand 
more  machinery  of  administration,  as,  for  example, 
the  certification  of  the  consul  in  the  place  where  the 
goods  come  from  to  the  correctness  of  the  invoice,  a 
corps  of  appraisers,  and  a  careful  examination  or  in- 
spection of  all  incoming  goods.  Little  of  this  iaJHi 
necessary  in  the  case  of  specific  duties.  Specific 
duties  are  now  retained  mainly  for  simple  commodi- 
ties of  uniform  value  per  unit,  or  for  rough  groups  of 
articles,  whose  value  is  easily  ascertained. 

The  watching  of  the  frontier  and  the  prevention 

of  smuggling  is  one  of  the  primary  difficulties  that 

have  to  be  overcome  in  the  administra- 

Smuggling. 

tion  of  customs  duties.  Goods  of  high 
value  and  easily  portable  are  not  very  well  adapted 
to  pay  such  duties,  unless  they  can  be  obtained  only 
from  distant  countries  and  are  thus  easy  of  identifi- 
cation. Whenever  there  is  a  heavy  excise  on  any 
commodity  there  is  generally  a  correspondingly 
heavy  customs  duty  as  well.  Sometimes  the  im- 
ported commodity  pays  both  the  duty  and  the  excise 
or  a  part  of  the  excise. 

The   political   or  protective   element   in   customs 
duties  has  been  gradually  retreating  in  importance, 
and  the  fiscal  has  correspondingly  advanced.     Stein^ 
iVol.  IL,PartII.,  p.  377. 


CHAP.  VII  CUSTOMS  DUTIES  229 

makes  this  the  sole  law  in  the  history  of   customs 
duties.     It  would   be   best   characterised  as  an  ad- 
vance of  the  fiscal  interest,  leaving  the   The  rise  of 
political  or  protective  interests  the  same  ^'^p^'"^""'^^'  <>/ 

.  „  the  fiscal  jprin- 

as    betore.      ihe  pressing  wants   of   na-  dpie. 
tions,  and   the  fact  that  federal  governments  have 
been  well-nigh  confined  to  these  taxes,  has  necessi- 
tated this  advance. 

Sec.  8.  We  may  now  look  at  some  examples  of 
customs  duties.  Those  of  England  are  particu- 
larly   instructive.  1      The     term     '''con-   „. 

History  ofcus- 

suetudines,^^  or  customs,  applied  to  the  toms  duties  in 
duties  levied  upon  imported  and  ex-  "^"^^""^• 
ported  commodities  even  before  the  Magna  Charta, 
bespeaks  their  antiquity.  In  the  time  of  the  Nor- 
man kings,  however,  trade  was  insignificant  and  the 
duties  not  very  productive.  The  original  duty  on 
wine  was  one  cask  from  every  cargo  of  between 
ten  and  twenty  casks,  two  from  twenty  or  more. 
What  the  original  duty  on  wool  was  is  not  known. 
Finally  the  system  settled  down  to  a  5  per  cent  tax 
on  all  imports  and  exports.  Down  to  1700  these 
duties  were  entirely  for  revenue  purposes  and  had  no 
intentional  protective  features.  At  one  time  their 
yield  was  nearly  £1,500,000.  The  eighteenth  cen- 
tury saw  a  changed  policy.  Special  protective  and 
prohibitive  duties  were  established.  This  was 
the  policy  of  the  entire  century,  except  during  the 

1  See  Hall,  History  of  the  Customs  Revenue,  and  Dowell,  History 
of  Taxation. 


230         INTRODUCTION  TO  PUBLIC  FINANCE     part  ii 

"long  peace"  of  Walpole,  1722-1739.  By  1759  the 
general  charges  were  25  per  cent,  while  many 
commodities,  like  tea,  coffee,  sugar,  wines,  and 
spirits,  paid  even  more.  The  expenses  of  the 
wars  which  marked  the  turn  of  the  century 
led  to  a  general  increase  of  charges  on  revenue- 
yielding  commodities.  Yet  with  all  the  many 
increases  in  the  tax  charges  there  was  not  a  corre- 
sponding increase  in  revenues.  In  some  cases  the 
high  duties  of  the  war  period  exceeded  the  limit  of 
what  the  goods  would  bear.  For  example,  sugar 
paid  duties  ranging  from  208.  to  398.  per  hundred- 
weight during  the  first  fifteen  years  of  the  nineteenth 
century.  But  the  annual  income  was  least  when  the 
duties  were  highest.  Consumption  fell  off  half  a 
million  hundredweight  under  the  higher  price.  It 
must  be  noted  that  this  result  was  obtained  in  the 
case  of  a  commodity  not  produced  in  the  country 
itself.  Salt,  also,  bore  a  heavy  duty  in  this  period 
to  the  lessening  of  the  consumption.  Tea,  coffee, 
tobacco,  wine,  and  other  foreign  products  were  also 
subject  to  revenue  duties  so  high  as  to  be  close  to, 
if  not  beyond,  the  limit  of  greatest  productivity. 

Interesting  and  instructive  is  the  experience  of 
England  with  protective  duties.  Export  duties  on 
England's  ^^^  material,  or  the  prohibition  of  the 
protective  exportation  thereof,  as  in  the  case  of 
wool,  was  originally  one  of  the  most 
prominent  features  of  the  English  system.  From  the 
middle  of  the  seventeenth  century  down  to  1825  the 


CHAP.  VII  CUSTOMS  DUTIES  231 

exportation  of  home-grown  wool  was  forbidden. 
Until  1802,  however,  the  importation  of  wool  was 
free.  Then  the  import  duty  rose  rapidly  from  5s. 
M.  per  hundredweight,  in  1802,  to  ^^%.  per  hundred- 
weight, in  1819.  To  encourage  the  production  of 
raw  silk,  heavy  duties  were  placed  upon  that  com- 
modity in  1765,  and  not  lessened  until  1825.  Linen 
manufacture  was  encouraged  by  bounties. 

The  chief  battles  over  the  customs  duties  in 
England  were  waged  around  the  "  corn-law."  ^ 
Two  things  among  others  of  minor  importance 
seem  to  have  contributed  mainly  to  the  establish- 
ment of  protective  duties  on  bread-stuffs. ^  The 
first  was  the  existence  of  heavy  public  burdens  upon 
land,  and  the  desire  to  compensate  land  owners  and 
land  users  therefor.  The  other  was  the  desire  to 
make  England  as  independent  as  possible  of  all 
foreign  nations  for  her  food  supply,  and  to  keep 
even  the  poorer  lands  in  cultivation.  According  to 
the  advocates  of  this  policy,  protection  was  needed 
to  enable  the  proprietors  and  tenants  to  buy  manu- 
factured products.  It  was  the  political  power  of  the 
proprietors  that  enabled  the  policy  to  be  maintained. 
The  various  tariffs  that  prevailed  may  be  conven- 
iently summarised  as  intended  generally  to  maintain 
a  chosen  price,  which  it  was  assumed  would  enable 

iThe  American  student  must  bear  in  mind  that  in  England 
*'  corn  "  means  wheat,  or,  in  general,  bread-stuffs. 

2  See  McCulloch,  Taxation,  p.  200  ;  Wilson,  National  Budget, 
p..  62  ff.  ;  Levy,  History  of  British  Commerce,  2d  ed..  Part  II., 
Chap.  7  ;  Rand,  p.  207  ff. 


232       INTRODUCTION  TO  PUBLIC  FINANCE       iart  ii 

the  producer  to  live,  and  would  not  place  too  heavy 
a  burden  on  the  consumer.  Hence  the  frequent  re 
course  to  a  sliding  scale  by  which  a  higher  duty  was 
imposed  as  the  price  fell.  The  best  example  is  the 
scale  adopted  by  Sir  Robert  Peel  (5  and  6  Vict.  c. 
14),  by  which  the  duty  was  to  be  208.  per  quarter 
when  the  price  was  SOs.  and  51s.,  and  decreased  Is. 
per  quarter  for  every  rise  of  Is.  in  price  ;  so  that 
the  duty  should  only  be  Is.  per  quarter  when  the 
price  rose  to  70s.  and  over.  The  idea  was,  clearly, 
to  maintain,  if  possible,  a  price  of  at  least  70s.  A 
similar  purpose  underlay  the  earlier  prohibition  of 
importation,  until  the  price  rose  above  80s.  per 
quarter. 

Popular  agitation,  headed  by  the  Anti-Corn  Law 
League,  was  based  upon  the  hope  of  cheaper  food 
The  eiimina-  suppHcs.  It  was  Supported  by  the  rapidly 
twnofthe        oprowins:  manufacturing  interests  in  the 

protective  o  o  n 

features.  expectation  that  cheaper  food  would  re- 

sult in  a  fall  in  wages.  After  years  of  effort  it 
brought  about  the  repeal  of  the  corn  laws  in  1846. 
The  sympathy  aroused  by  the  Irish  famine  of  the 
same  year  contributed  to  this  end.  Just  before 
the  repeal  of  the  corn  laws  Peel  had,  in  1842, 
simplified  the  whole  tariff  by  eliminating  many  of 
the  protective  features,  especially  by  removing  duties 
on  raw  material  and  freeing  a  number  of  small  articles. 
As  a  substitute  source  of  revenue  the  income  tax 
was  restored.  Gladstone,  in  1860,  completed  the  re- 
moval of  protective  features.     Since  that  time  it  has 


CHAP.  VII  CUSTOMS  DUTIES  233 

been  true,  in  the  words  of  Bastable,  that  "the 
English  customs  system  is  remarkable  for  its  vigor- 
ous adherence  to  the  principle  of  purely  financial 
duties.  All  traces  of  a  political  aim  in  the  imposi- 
tion of  customs  duties  have  now  disappeared."  The 
corn  duty  was,  however,  restored  as  a  revenue  measure 
at  the  time  of  the  Boer  War.  It  lasted  but  a  short 
time,  namely,  from  April  15,  1902,  to  July  1,  1908, 
and  durihg  that  time  yielded  ^2,448,000.1 

During  the  fiscal  year  1907-1908  the  customs 
yielded  X  32,500,000  as  follows  :  tobacco,  ,£13,739,000; 
tea,  X5,807,000;  coffee,  £184,000;  cocoa,  etc., 
£287,000;  chicory,  £47,000;  currants,  raisins,  and 
other  dried  fruits,  £456,000;  sugar,  £6,708,000; 
beer,  £23,000  ;  spirits,  £4,133,000  ;  wine,  £1,177,000. 

There  are  now  only  about  40  rates  in  the  English 
customs  tariff.  In  1875  there  were  53,  as  against 
397  in  1859,  and  1046  in  1840. 

Sec.   9.    The  difficulty  of   administering  customs 
duties  in  the  small  and  scattered  areas  of  the  differ- 
ent States  of  Germany   led  to  the   for-  rpj^gQ^j^^n 
mation   of    the    German   customs  union  customs 
(ZoUverein')  in  1833.     This  union,  which  ''''^''' 
at  first  embraced  a  population  of  25,000,000  and  a 
territory  of  80,600  square  miles,  grew  in  size  and  in 
permanence    with   the  renewal,  from   time  to  time, 
of   the   treaties   which   bound   together  the   States 
composing  it,  and  with  the  entrance  of  new  States, 

iThe  so-called  "registration"  duty,  1869-1870,  yielded 
£1,000,000  during  the  entire  period  of  its  existence. 


234  INTRODUCTION   TO  PUBLIC  FINANCE    part  n 

SO  that  in  1854  it  embraced  98,000  square  miles 
and  35,000,000  inhabitants.  It  was  the  core  of 
the  present  German  Empire.  At  the  beginning 
the  moderate,  mainly  revenue,  duties  of  Prussia 
were  adopted.  In  the  tariff  of  1865  the  rates 
were  lowered  and  many  removed.  Duties  on  grain 
and  on  almost  all  raw  materials  were  removed,  and 
the  duties  on  manufactured  goods  reduced.  The 
free-trade  tendency  which  accomplished  this  change 
lasted  until  long  after  the  formation  of  the  Empire, 
indeed  down  to  1877. 

The  constitution  of  the  Empire  confers  upon  the 
imperial  legislature  the  exclusive  power  to  regulate 
customs.  It  may  levy  taxes  to  any  amount  upon 
The  customs  ^^^  articles  exported  or  imported,  for 
of  the  Empire,  revcnuc  purposcs  or  for  protection  or  for 
both.  But  the  imperial  legislature  cannot  tax  any- 
thing else.  Further  revenues,  if  needed,  can  be 
raised  in  the  form  of  an  apportioned  requisition 
upon  the  commonwealths  of  the  Empire.  The 
growing  need  of  the  Empire  for  revenues  was  ac- 
companied by  a  wave  of  protectionist  sentiment,  so 
that  the  increased  duties  were  more  and  more  pro- 
tective in  character.  It  is  true,  however,  that  the 
revenue  features  were  increased  at  the  same  time. 

Particularly  interesting  is  the  duty  on  grain,  intro- 
duced in  1879,  and  raised  several  times  since  then. 
The  rate  is  now  5  M.  per  100  kilograms  for  wheat 
and  rye,  4  M.  for  oats,  2 J  M.  for  barley.  These 
duties  are  in  some  measure  protective  in   ordinary 


CHAP.  VII  CUSTOMS  DUTIES  235 

seasons.  It  is  frequently  found  that  a  part  of  the 
revenue  which  flows  into  the  treasury  from  this 
source,  especially  in  extraordinary  years,  is  paid  by 
others  than  the  consumer. i  Generally,  however, 
the  consumers  pay  the  home  producers  a  goodly  sum 
in  the  shape  of  higher  prices.  The  operation  of 
these  grain  duties  has  been  materially  modified  in 
recent  years  by  the  conclusion  of  commercial  treaties 
with  some  of  the  grain-producing  countries.  The 
main  revenues  from  customs  duties  in  the  Empire 
come  from  coffee,  tobacco,  wine,  and  grain. 

Sec.  10.  France  has  a  highly  developed  system 
of  customs  duties.  By  the  edict  of  1664  Colbert 
attempted  to  reduce  to  a  single  uniform  History  of  the 
scheme  all  the  confused  and  multifarious  French  tariff. 
customs  charges  that  had  come  down  from  feudal 
times  and  were  in  the  hands  of  many  different 
authorities.  The  tariff  thus  established  was  pro- 
tective in  character  and  was  dictated  mainly  by  the 
mercantile  doctrine.  But  many  provincial  duties 
were  left,  and  as  time  went  on  confusion  increased. 
The  Revolution  swept  all  the  old  taxes  away,  and  in 
1791  the  system  which  is  the  basis  of  the  present 
one  was  established. 

The  development  since  then  has  been  gradual. 
Prohibitions  of  imports  and  exports,  so  numerous  in 
the  tariffs  of  the  ancient  monarchy,  have  now  all 
been  removed.  Since  1863  the  only  exceptions  to 
this  statement  are  books  that  infringe  the  copyright 
1  See  example  cited  above  ;  also  Cohn,  p.  665  ff. 


236  INTRODUCTION  TO  PUBLIC  FINANCE     part  ii 

law  and  munitions  of  war.  To  insure  the  proper 
registration,  for  statistical  research,  of  all  traffic, 
there  used  to  be  an  import  charge  on  all  goods  of 
15  centimes  per  100  francs'  worth  or  50  centimes  per 
100  kilograms,  and  an  export  charge  of  25  centimes 
per  100  kilograms.     These  have  been  removed.  ^ 

During  the  period  subsequent  to  the  Revolution, 
and  down  to  1814,  war  measures  left  no  opportunity 
to  test  the  tariff  of  1791.  The  Restoration  estab- 
lished a  highly  protective  system  at  the  instigation 
of  the  Chambers.  The  Second  Republic  continued 
the  same  policy.  Napoleon  III.,  finding  himself 
unable  to  persuade  the  deputies  to  change  the  tariff, 
removed  many  of  tlie  prohibitive  duties  by  treaties. 
The  first  of  these  treaties,  with  England  in  1860, 
fixed  tha  maximum  ad  valorem  duty  on  English  goods 
at  30  per  cent  for  the  first  four  years  and  25  per  cent 
after  that.  Other  treaties  followed,  extending  similar 
privileges  to  other  countries.  In  the  spirit  of  these 
treaties  the  tariff  itself  underwent  many  amend- 
ments, raw  products  were  admitted  free,  duties  on 
foods  were  removed  or  lowered,  and  the  duties 
protecting  the  stronger  manufactures  were  lowered. 
By  1873,  that  is,  after  the  struggle  with  Germany 
The  two  was  over,  and  after  the  revenue  system 

tort/s.  ijad  been  rearranged  to  meet  the  tremen- 

dous burden  which  was  the  consequence  of  the  war, 

1  On  the  whole  subject  see  Levasseur,  "  Recent  Commercial  Policy 
of  France,"  JowrnaZ  of  Political  Economy,  Vol.  I.,  No.  1,  December, 
1892. 


CHAP.  VII  CUSTOMS  DUTIES  237 

France  had  two  distinct  tariffs.  First,  the  gen- 
eral tariff  built  upon  the  law  of  1791  amended 
many  times.  Second,  a  conventional  tariff  based 
upon  treaties.  Since  these  treaties  generally  con- 
tained the  clause  granting  each  nation  the  same 
privileges  as  the  most  favoured,  this  tariff  was  more 
uniform  than  the  method  of  construction  would  lead 
one  to  expect.  In  1881  the  general  tariff  was  pretty 
thoroughly  revised  so  as  to  approach  the  treaty 
tariff.  Manufactures  .were  slightly  protected.  With 
this  as  a  starting-point  new  treaties  were  made. 

One  of  the  most  remarkable  reforms  that  any 
tariff  has  ever  undergone  was  accomplished  in  1892. 
This  was  the  passage  of  two  tariffs  in  a  The  tariff  re- 
single  law.  There  was  first  a  general  formofi892. 
tariff  or  maximum  which  was  to  be  levied  on  goods 
from  all  countries  not  obtaining  special  privileges 
by  treaties.  Second,  a  minimum  tariff  marking  the 
lower  limit  to  which  the  concessions  might  go.  The 
latter  was  to  be  applied  to  the  native  products  of 
those  countries  which  grant  French  products  re- 
ciprocal privileges.  Both  of  these  tariffs  were  pro- 
tective. There  are  over  700  items  in  the  maximum 
tariff,  but  the  number  on  which  concessions  could  be 
made  was  considerably  less. 

Sec.  11.  The  tariff  history  of  the  United  States 
has  been  written  many  times. ^  Its  effects  have  been 
explained  in  many  different  ways.     Not  one  of  the 

1  Sumner,  History  of  Protection  in  the  United  States ;  Taussig, 
Tariff  History  of  the  United  States, 


238  INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

many  histories  is  clearer  and  more  impartial  than 
„    .^,.  the  short  statement  by  Professors  Selisf- 

Tarxff  history  -^  ° 

of  the  United    man  and  R.  Mayo  Smith,  printed  (in  Eng- 
States.  iigj^^^  -j^  ^]^g  publications  of  the  Vereinfiir 

Socialpolitik,  1892  (Vol.   XLIX.,  Part  1).     Nothing 
but  the  barest  outlines  can  be  attempted  here. 

The  colonial  policy  of  England  prohibited  the  ex- 
portation of  the  more  important  commodities,  the 
"  enumerated  "  articles,  to  an}^  country  but  England. 
Importation  was  to  take  plac£  only  from  British 
ships.  As  was  seen  in  the  chapter  on  Protective 
Expenditure,  bounties  were  paid  to  encourage  agri- 
cultural products.  The  only  import  dut}'  in  the 
colonies  was  that  imposed  in  1773  on  rum,  molasses, 
and  sugar  from  other  than  British  colonies. 

After  the  War  of  Independence  there  was  a  move- 
ment to  protect  the  new  industries  which  had  sprung 
up.  As  Congress  did  not,  until  the  adoption  of  the 
new  constitution  in  1789,  have  the  power  to  collect 
duties,  the  commonwealths  tried  to  afford  the  de- 
sired protection.  There  is  naught  but  confusion  in 
these  efforts,  all  of  which,  however,  came  to  an  end. 
when  the  commonwealths  were  forbidden  to  levy 
customs  duties. 

The  tariff  was  the  sole  source  of  tax  revenue  which 
the  new  federal  government  had.  It  was,  conse- 
The  beginning  qucutly,  largely  Utilised  from  the   first. 

of  the  tariff.        J)^^^^  ^^  ^^^  ^^^^^  ^f  ^^^  ^^^  ^^  -^g-^2  the 

tariffs  were,  in  effect,  if   not  in  intention,  revenue 
and  not  protective  tariffs.     The  rates  were  generally 


CHAP.  VII  CUSTOMS  DUTIES  239 

low,  except  on  purely  revenue  articles  like  sugar, 
tea,  coffee,  and  wine.  The  Orders  in  Council,  the 
Berlin  and  Milan  decrees,  on  the  east  side  of  the 
Atlantic,  and  the  Embargo  and  Non-Intercourse 
acts,  on  the  west  side,  followed  by  the  War  of  1812, 
gave  absolute  protection  to  American  industries  and 
seriously  lessened  the  growth  of  the  customs  revenue 
of  the  government  for  a  period  of  seven  years.  It  is 
not  surprising,  therefore,  to  find  the  new  industries 
which  had  been  forced  into  existence  during  that 
time  calling  loudly  for  protection  after  the  peace. 
A  strong  protectionist  sentiment  arose  which  in- 
itiated a  policy  that  had  scarcely  more  than  a 
temporary  setback  from  1816   to   1895.    ^,.  ^    .    . 

^  -'  /le  beginning 

That  policy  was  to  combine  high  pro-  of  the  protec- 
tective  duties  with  important  revenue  ^^^^P^^^^y- 
duties.  The  main  arguments  advanced  for  and 
against  the  policy  of  protection  have  been  stated 
under  Expenditure.  The  industries  protected  were 
the  textiles,  cotton  and  wool,  and  iron.  Among 
the  revenue  duties  may  be  named  those  on  tea, 
coffee,  and  wine,  and  perhaps  those  on  sugar  and 
tobacco.  The  first  period  of  the  protective  policy 
passed  the  highwater  mark  in  1828. 

The    only    important   setback   which   the   policy 
sustained   before  the   recent  tariffs   was  in   the  so- 
called   free-trade    period    from    1846   to  rpfi^  go_caned 
1860.     The   act   of   1846    was   heralded  free-trade 
as  a  tariff  for  revenue  only,  but  it  was  ^^^ 
still  highly  protective.     The  duties  on  the  classified 


240  INTRODUCTION   TO  PUBLIC  FINANCE    part  n 

commodities  ranged  from  5  per  cent  to  100  per  cent ; 
the  last  on  spirits.  Some  purely  revenue  duties 
were  removed  entirely,  as,  for  example,  the  duty  on 
tea  and  coffee.  The  protected  textile  industries  re- 
tained their  duties  for  the  most  part ;  woollens  20 
to  30  per  cent,  cottons  the  same,  iron  30  per  cent. 
All  the  duties  were  made  ad  valorem^  a  change  which 
involved  an  increase  in  the  cost  of  administration. 
A  more  substantial  reduction  was  made  in  1857. 

The  crisis  of  1857  resulted  in  a  serious  decline  in 
the  revenues,  and  just  before  the  Civil  War  broke 
The  Morrill  out,  Congress  passcd  the  so-called  Mor- 
to^<^-  rill  tariff,  March  2,  1861.     This  tariff  in- 

creased  the  protective  duties,  especially  on  iron  and 
woollens.  From  the  technical  side  this  act  made  two 
changes  of  note.  First,  specific  duties  were  again 
restored  ;  second,  the  system  of  so-called  compen- 
sating duties  was  initiated.  This  second  feature, 
which  afterwards  received  a  very  broad  application, 
can  best  be  made  clear  by  an  illustration.  The 
Morrill  tariff  increased  the  duty  on  raw  wool.  To 
compensate  the  manufacturers  for  this,  a  specific 
duty,  supposed  to  represent  the  duty  on  raw  ma- 
terials, was  placed  on  manufactures  of  wool,  to- 
gether with  an  ad  valorem  duty  for  protection. 
.  Immediately  after  the  passage  of  the  Morrill  act 
the  war  broke  out.  Under  the  pressure  of  the  need 
The  war  for    revenues    Congress    passed    a    long 

tariffs.  series  of   acts  increasing    the  duties  on 

purely  revenue  articles,  putting  duties  upon  articles 


CHAP.  VII  CUSTOMS  DUTIES  241 

hitherto  free,  and  raising  as  compensation  the  pro- 
tective duties.  The  idea  of  giving  compensatory 
duties  was  extended  to  cover  the  burden  of  internal 
taxes  also.  Thus  the  manufacturers  were,  in  1864, 
given  special  compensatory  duties  to  offset  the  heavy 
internal  taxes.  This  remarkable  protectionist  meas- 
ure, embodied  in  the  act  of  1864,  was  rushed  through 
Congress  with  only  one  day's  discussion  in  each 
house.  It  represents  the  highest  limit  ever  reached. 
Nearly  1500  articles  were  enumerated ;  the  average 
rate  was  close  to  50  per  cent.  It  shows  the  effect 
of  three  different  forces  :  there  was  (1)  the  desire 
to  increase  the  revenues,  (2)  the  feeling  that  the 
manufacturer  had  a  good  claim  for  compensation  for 
the  high  taxes  in  general,  (3)  the  mad  scramble  to  gain 
all  that  could  be  gained  from  this  class  of  legislation. 

This  act  afterward  received  a  number  of  amend- 
ments to  meet  the  changes  made  in  the  other  parts 
of  the  revenue  system,  but  the  character  of  the  tariff 
was  not  materially  changed  until  1883.  One  of  the 
most  interesting  changes,  technically,  was  the  fixing, 
in  1866,  of  the  method  of  ascertaining  the  value 
upon  which  the  duty  was  laid.  It  was  provided  that 
the  value  should  be  determined  by  adding  to  the 
value,  at  the  place  of  shipment,  the  cost  of  trans- 
portation, packing,  commission,  warehousing,  and 
other  charges  which  fell  upon  the  goods  before 
their  arrival. 

The  protection  policy  thus  extended  gave  strength 
to  vested  interests  which  thereafter  supported  that 


242         INTRODUCTION   TO  PUBLIC  FINANCE    part  il 

policy.  Theonly  changes  of  note  down  to  1894  are  the 
attempted  reforms  of  1870, 1873,  and  1883, 
xons.  ^^^  ^^^  McKinley  tariff  of  1890,  which  re- 
duced the  income  by  removing  the  duties  on  purely 
revenue  articles  and  on  very  strong,  self-sustaining 
industries,  but  increased  the  protective  features. 

In  1891  came  a  change  that  at  first  appeared  to  be 
very  important.  The  McKinley  bill  of  1890  had  be- 
Reduction  f  ^^""^^  practically  the  platform  of  the  Re- 
jrrotective  publicau  party,  and  the  Democratic  party 
^^^'  went  into  power  pledged  to  the  reduction 

of  protection.  They  proceeded  slowly  to  the  fulfil- 
ment of  these  pledges.  The  famous  Wilson  bill  was 
reported  December  19,  1898,  and  became  a  law 
August  27,  1894,  without  the  approval  of  the  Demo- 
cratic President.  It  failed  of  his  approval  because  of 
the  objectionable  features  introduced  in  the  Senate. 
Two  things  prevented  the  change  from  being  sweep- 
ing. The  first  was  the  power  of  the  vested  interests 
in  the  protected  industries.  Every  sort  of  pressure, 
short  of  illegal,  was  brought  to  bear  in  favour  of 
the  existing  system.  The  second  was  the  patent 
danger  of  too  sudden  a  decrease.  Sweeping  reform 
would  ruin  industries  and  create  a  depression. 

The  reduced  tariff  was  not  destined  to  remain  long 
in  force.  Within  three  years,  that  is,  in  1897,  there 
The  Dingiey  was  a  deficit  in  the  treasury,  which  gave 
*^^ff-  an  excuse  for  new  tariff  legislation.     By 

this  time  the  protectionists  had  rallied  and  were  again 
in  power.     Congress  was  called  together  in  special 


CHAP.  VII .  CUSTOMS  DUTIES  243 

session  and  passed  the  so-called  Dingley  tariff,  as  a 
strict  party  measure.  This  tariff  restored  most  of 
the  protective  features  that  had  been  removed  in 
1894.  Protection  was  again  granted  to  wool  as  a 
raw  material,  and  compensatory  duties  were  placed 
on  manufactures  of  wool.  In  some  respects  the 
wool  and  woollen  schedule  was  made  higher  than 
ever  before.  Hides,  which  had  been  on  the  free  list 
ever  since  1872,  were  given  a  protective  duty  of  15 
per  cent  ad  valorem,  while,  to  quiet  the  protests  of 
the  shoemakers,  manufacturers  of  leather  received  a 
compensatory  duty  that  fully  made  up  for  the  in- 
creased cost  of  the  raw  material.  On  cotton  goods, 
however,  the  duties  were  slightly  reduced,  although 
not  all  along  the  line.  Silk  and  linen  received  a 
rather  substantial  advance.  The  iron  schedule  was 
not  materially  changed  from  the  condition  in  which 
it  was  left  by  the  McKinley  bill.  The  greatest 
struggle  was  waged  around  the  sugar  tariff.  The 
duty  placed  on  raw  sugar  in  the  Wilson  bill  was 
retained  and  slightly  increased,  while  the  refiners 
received  a  differential  that  afforded  them  very  hand- 
some protection.  On  the  whole  the  Dingley  tariff 
raised  the  protective  wall  higher  than  ever. 

Having  reached  this  stage,  the  protective  system 
rested  for  twelve  years.  During  this  time  there 
developed,  very  slowly,  a  sentiment  for  tariff  re- 
form. The  protectionists  yielded  a  little  to  this 
sentiment,  and  won  the  privilege  of  having  the 
tariff    "revised    by   its    friends,"     In   April,   1909, 


244  INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

Congress  was  again  assembled  in  special  session  to 
"  provide  revenues  to  meet  a  deficit "  and  to  consider 
a  bill  known  as  the  Payne  bill,  which  had  been  pre- 
pared by  a  committee  of  Republicans  with  a  view  to 
propitiating  the  sentiment  in  favour  of  tariff  reduction. 
Of  this  bill  the  committee  said:  "While  it  makes  a 
number  of  reductions  in  the  rates  on  industries  that 
can  admittedly  stand  alone,  it  raises  the  rates  on 
certain  industries,  that  in  the  opinion  of  the  com- 
mittee need  more  protection."  Tiiis  bill  was  heavily 
amended  in  the  Senate  where  the  protectionists  were 
strongly  intrenched.  It  was  again  amended  under 
pressure  from  the  Republican  President  who  inter- 
preted the  election  promises  of  his  party  as  favouring 
a  revision  downward.  When  the  President  signed 
the  bill,  August  5, 1909,  he  summarised  it  as  follows: 
"  This  is  not  a  perfect  tariff  bill,  nor  a  complete  com- 
pliance with  the  promises  made,  strictly  interpreted, 
but  fulfilment,  free  from  criticism  in  respect  to.  a 
subject-matter  involving  many  schedules  and  thou- 
sands of  articles  could  not  be  expected.  It  suffices  to 
say  that  except  with  regard  to  whiskey,  liquors,  and 
wines,  and  in  regard  to  silks  and  to  some  high  classes 
of  cottons,  all  of  which  may  be  treated  as  luxuries 
and  proper  subjects  of  a  revenue  tariff,  there  have 
been  very  few  increases  in  rates.  There  have  been  a 
great  number  of  real  decreases  in  rates  and  they 
constitute  a  sufficient  amount  to  justify  the  state- 
ment that  this  bill  is  a  substantial  downward  revision 
and   a   reduction  of   excessive  rates."     One  of   the 


1 


CHAP.  VII  CUSTOMS  DUTIES  245 

interesting  features  of  the  bill  is  the  provision  of 
two  tariffs  in  one,  which  is  popularly  supposed  to  be 
a  partial  adoption  of  the  idea  of  the  French  maxi- 
mum and  minimum  tariff  above  referred  to.  But 
there  is  a  fundamental  difference,  for  if  the  French 
system  is  properly  described  as  a  "maximum-minimum 
tariff,'"  that  proposed  for  the  United  States  is  a  "  mini- 
mum-maximum tariff."  That  is,  the  French  system 
applies  the  maximum  as  a  norm,  from  which  deductions 
may  be  made  for  favours  received.  But  the  Ameri- 
can system  applies  the  minimum  as  a  norm,  to  which 
additions  may  be  made  by  way  of  reprisal  in  the  case 
of  those  countries  whose  tariff  policy  does  not  please 
the  United  States.  In  other  words,  the  French  sys- 
tem is  one  of  reciprocity,  the  proposed  American 
system  one  of  retaliation.  Possibly  no  other  posi- 
tion can  be  adopted  by  the  United  States.  She  has 
steadfastly  maintained  that  the  "  most  favoured  na- 
tion" clause  in  her  commercial  treaties  cannot  be 
construed  as  applying  to  the  tariff,  and  many  of  the 
duties  in  the  tariffs  of  European  nations  are  directed 
specifically  against  the  trade  of  the  United  States  by 
way  of  retaliation  for  her  own  high  duties.  The 
bill  is  not  generally  regarded  as  a  final  settlement  of 
the  tariff  question.  It  contains  a  provision  for  the 
appointment  of  expert  agents  to  assist  the  President 
in  administering  the  maximum-minimum  clause  and 
many  hope  that  this  will  lead  to  the  collection  of 
information  which  will  render  a  systematic  and 
unprejudiced  revision  possible. 


CHAPTER  VIII 

PKOPERTY   TAXES  fff^ 

Part  1.     The    General  Property  Tax,  with  Special 
Reference  to  United  States 

Section  1.  The  general  property  tax  may  be 
defined  as  a  tax  in  which  the  base  is  the  entire 
amount  of  the  property,  real  and  personal,  owned  by 
the  taxpayer.  This  tax  is  old  and  is  a  favourite  tax 
for  local  purposes.  The  general  property  tax  can 
be  studied  to  the  best  advantage  in  the  United  States, 
The  general  where  it  isused  more  extensively,  perhaps, 
property  tax      than  in  any  other  country,  and  where  it 

exemplified         .     ,i  .  c  t- 

in  the  United  IS  the  main  source  01  revenue  tor  very  im- 
States.  portant  parts  of  the  government.     It  is 

also  used  in  Switzerland  as  the  main  source  of  revenue 
for  some  of  the  component  parts  of  the  federal  State. 
In  Prussia,  Holland,  and  some  other  countries  it  is 
used  to  supplement  other  taxes,  but  when  so  used,  it 
takes  on  a  different  character.  The  federal  govern- 
ment in  the  United  States  does  not  levy  any  tax  on 
property  in  general.  If  under  the  constitutional 
provision,  which  requires  that  direct  taxes  shall  be 
apportioned  among  the  states  in  proportion  to  popu- 
lation,  the  federal  government  should  levy  a  tax, 
that  tax  would  presumably  be  apportioned  among  the 

246 


CHAP.  VIII  PROPERTY   TAXES  247 

people  by  most  of  the  states  in  accord  with  their  own 
laws,  and  collected  as  their  own  state  taxes  are 
collected. 

We  need  to  see  first  the  relation  in  which  this  tax 
stands  to  the  other  taxes  in  the  system  of  state  and 
local  taxation.  * 

The  individual  states,  the  cities,  and  the  other  local 
divisions  of  government  in  the  United  States  derive 
their  revenues  from  a  considerablenumber  of  sources. 
They  each  use  some  or  all  of  the  following 
taxes:  (1)  the  general  property  tax  ;  (2)    l^lZ'genlrai 
the  poll  tax,  payable  either  in  money  or  v^operty  tax 

r     ,  ••         ^ON     i  *^  the  com- 

in  services  or  in  both ;  (3)  taxes  on  se-  rnonweaUNs 
lected  kinds  of  business  ;  (4)  taxes  on  revenue 
certain  ways  of  conducting  business,  as  *^*^^" 
the  corporate  form;  (5)  inheritance  taxes,  and  (6),  in 
a  few  instances,  income  taxes.  They  also  use  license 
taxes  or  fees  for  permits  which  are  distinguished  from 
taxes  proper  by  the  fact  that  regulation  rather  than 
revenue  is  the  more  important  consideration.  They 
also  receive  other  fees  of  many  sorts,  mostly  small, 
for  special  services  to  individuals,  recording  of  docu- 
ments, and  the  like.  Streets,  sewers,  and  other  simi- 
lar public  improvements  are  mostly  constructed  from 
the  proceeds  of  special  assessments  on  the  property 
immediately  benefited.  The  cities,  especially,  not  all, 
but  many  of  them,  and  to  a  very  small  extent  the 
states  also,  receive  revenue  from  waterworks,  gas 
and  electric  works,  street  railways,  canals,  and  other 
public  service  enterprises  and  to  a  very  small  extent 


248        INTRODUCTION   TO   PUBLIC  FINANCE     part  ii 

from  industrial  and  commercial  enterprises.  A  few 
of  the  states  receive  revenue  from  the  sale  or  use  of 
public  lands.  There  are  in  addition  a  number  of 
fines  and  penalties  for  various  infractions  of  law. 

Among  all  of  these  sources  of  revenue  the  general 
property  tax  stands  preeminent.  It  is  the  struc- 
tural iron  vv^hich  holds  the  building  together.  It  is 
The  preemi-  the  largest  single  source  of  revenue  and 
nenceofthe       is  universally   regarded  as  preeminently 

general  prop-  ^  o  r  j 

ertytax.  the  tax  for   all   purposes.     There   is    no 

state  in  the  Union  in  which  this  tax  does  not  exist 
at  least  as  a  tax  for  local  purposes,  although  there 
are  six  states  in  which  it  is  not  used  to  supply  reve- 
nue for  the  state  or  central  government.  Without 
a  single  important  exception,  it  is  used  in  every  city, 
in  every  town  or  its  counterpart  in  local  government, 
in  every  district,  be  it  a  road  district,  school  district, 
drainage  or  irrigation  district,  or  a  district  organised 
for  some  other  purpose.  The  few  exceptions  are 
insignificant,  and  are  in  each  case  due  to  conditions 
clearly  peculiar. 

The  general  property  tax  of  the  United  States  was, 
in  its  original  conception,  a  direct  personal  tax  for 
local  purposes.  It  was  a  tax  on  persons,  natural  or 
The  general  Corporate,  in  proportion  to  all  their  prop- 
l^H^naiiyl  ^"^^^ '  The  Only  exemptions  were  origi- 
personal  tax.  nally  pcrsous,  usually  corporate,  like 
municipal  corporations,  schools,  colleges,  and  churches 
which  were  regarded  as  performing  some  public  or 
quasi-public  functions.     Sometimes  natural  persons, 


CHAP.  VIII  PROPERTY   TAXES  249 

like  ministers  of  the  gospel,  paupers,  invalids,  or  vet- 
erans of  war,  were  exempt  from  pious,  religious, 
charitable,  or  patriotic  motives.  The  present  statutes 
still  show  marked  traces  of  the  personal  character  of 
this  tax  as  originally  conceived.  As  an  illustration 
of  the  older  conception  we  may  cite  Vermont,  where 
every  person  was  "rated"  or  "listed"  for  his  poll, 
his  property,  and  all  his  "  faculties."  In  all  the 
older  laws  the  "person"  came  first,  and  his  estate 
was  the  attribute  by  which  the  amount  of  his  tax 
was  measured. 

It  was  a  local  tax  intended  primarily  for  the  appor- 
tionment of  neighbourhood  charges  among  neighbours. 
The  functions  of  government  were  at  first   „,  , 

o  The  general 

exercised  mainly  by  the  local  divisions,  property  tax 
Even  as  late  as  1840,  when  the  functions  ^' "  ^'''^"^  '"^• 
and  activities  of  the  state  or  central  governments 
had  reached  the  first  stage  in  their  development,  this 
tax  was  used  to  a  very  limited  extent  only,  for  sup- 
plying revenue  for  other  than  strictly  local  purposes. 
By  slow  degrees  the  larger  unit  of  government,  the 
commonwealth,  began  to  draw  upon  this  source  by 
way  of  ratesadditional  to  the  local  taxes.  Strangely 
enough,  these  added  rates  rarely,  if  ever,  took  the 
form  of  a  surtax  so  common,  for  example,  in  Spanish 
taxation,  nor  did  the  surtax  conception  enter  Ameri- 
can financial  thought  anywhere  until  after  1890. 
Yet  the  effect  of  these  additional  tax  rates  is  distinctly 
the  same  as  that  of  the  surtax. 

By  degrees,  also,  the  strictly  personal  conception  of 


250         INTRODUCTION   TO  PUBLIC  FINANCE     part 

the  tax  has  been  modified,  and  it  has  steadily  become 
The  general  moFC  and  more  of  an  objective  tax,  or  a 
hecmnlsT^  real  tax.  This  change  has  come  about 
''real"  tax.  first  through  customs  operating  with  the 
force  of  law,  and  is  not  even  now  so  apparent  in  the 
statutes  as  it  is  in  the  actual  administration.  With 
several  notable  exceptions,  of  which  New  York  is  a 
conspicuous  example,  the  personal  declaration  of  the 
taxpayer  may  still  be  required  and  is  more  or  less  regu- 
larly exacted.  But  even  where  this  form  is  still  re- 
tained, property,  even  real  estate,  may  be  taxed  in 
the  name  of  "  unknown  owners."  As  commonly 
conceived  by  legislator,  administrator,  and  taxpayer 
alike,  the  general  property  tax,  as  it  stands  to-day,  is 
a  tax  on  all  property,  irrespective  of  ownership, 
within  the  territory  of  the  taxing  authority,  except 
such  as  may  be  expressly  exempted  on  account  of  its 
use  for  a  public  or  quasi-public  purpose  or  out  of 
consideration  for  what  is  regarded  as  a  desirable 
public  policy.  As  an  illustration  of  this,  we  may 
quote  the  phrase  most  widely  used  as  the  introduc- 
tory sentence  of  the  revenue  laws  of  the  various  states: 
"  All  property,  real  and  personal,  within  this  state, 
not  specially  exempt,  shall  be  taxed  in  proportion  to 
its  value."  Yet  traces  of  the  older  conception  of 
a  personal  tax  remain,  often  inconsistent  and  illogi- 
cal, and  giving  rise  to  confusion  of  thought  and 
practice. 

Sec.  2.    Although  this  venerable  tax,  which  dates 
from   soon   after   the  establishment  of   the   various 


CHAP,  vlii  PROPERTY   TAXES  251 

colonies  on  the  continent  of  America,  has  been  de- 
veloped in  each  of  the  several  states  from  a  common 
origin  as  to  principles  and  ideas  and  by 
very  similar  social,  political,  and  eco-  the  general 
nomic  forces,  yet  there  are  variations  vropertytax. 
from  state  to  state,  and  from  one  part  of  the  country 
to  another",  which  are  by  no  means  insignificant.  Some 
of  them  are,  in  fact,  so  important  that  a  failure  to 
recognise  them  leads  to  a  serious  confusion  of  thought. 
It  is  this  divergence,  in  one  state  or  another,  from  the 
general  type  which  makes  it  so  difficult  to  explain 
briefly  the  nature  of  American  tax  problems.  These 
differences  concern  in  some  degree  the  kinds  and 
classes  of  property  subject  to  the  tax.  But  they  con- 
cern in  far  greater  measure  the  forms  and  methods  of 
administration,  and  as  it  is  on  the  administrative  side 
that  the  greatest  evils  have  been  apparent,  these 
may  be  considered  as  the  more  important. 

Although,  as  just  suggested,  the  constitutional 
provisions,  the  statutes,  the  ordinances,  and  the 
equally  potent  controlling  practices,  customs,  and 
traditions  vary  from  state  to  state,  and  although  no 
two  of  them  are  exactly  alike,  it  would  nevertheless 
be  an  exaggeration  to  say  that  there  are  fifty-one 
different  varieties  of  the  general  property  tax  in  the 
United  States.  Such  a  statement  would  lay  too  much 
emphasis  on  minor  details.  There  are,  however, 
several  more  or  less  distinct  types.  Some  of  the 
differentiating  characteristics  of  these  types  are 
the  result  of  the  differences  in  the  framework  of  the 


1 


252        INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 

government,^  others  arise  from  differences  in  the 
social  and  industrial  development. 

In  attempting  to  describe  these  types  in  a  brief 
space  we  inevitably  incur  all  the  dangers  of  any 
broad  generalisation.  It  should  be  understood  that 
in  many  cases  the  types  interblend;  also,  that  for 
clearness'  sake  we  shall  select  examples  of  the  extreme 
forms  of  each  type.^ 

Among  the  oldest  types  is  that  which  we  may  call 
the  New  England.  This  extends  wherever  the  New 
England  township  form  of  local  government  extends, 
and  even  where  the  township  system  is  modified  by 
a  superimposed  county  system.  That  is,  in  all  the 
territory  north  of  the  Ohio  River  and  of  its  line  ex- 
TWNew         tended   as   far  westward   as   the   Rocky 

England  type     __  .  t    •      i 

of  general  Mountains.  It  IS  that  type  of  the  general 
jrropeHy  tax.  property  tax  which  is  the  historical  out- 
growth of  the  well-known  and  famous  "  township " 
system  of  local  government.  It  differs  from  the 
other  types  not  so  much  by  reason  of  any  difference 
in  the  underlying  conception  of  who  and  what  is  tax- 
able, as  it  does  in  its  administrative  features.  In 
general,  the  administrative  or  tax  district  is  small, 

1  Any  reader  not  familiar  with  the  various  forms  of  local  govern- 
ment in  the  United  States  will  find  enlightenment  in  Fiske,  Civil 
Government  in  the  United  States;  Bryce,  American  Common- 
wealth ;  and  Hinsdale,  American  Government. 

2  The  reader  who  wishes  to  delve  into  the  multitudinous  details 
and  variations  is  referred  to  the  present  writer's  contribution  to  the 
Census  Volume  on  Wealth,  Debt,  and  Taxation.  Special  Report, 
12th  Census,  1907. 


CHAP.  VIII  PROPERTY  TAXES  253 

very  small.  In  the  "West "it  is  a  township,  six 
miles  square  ;  in  older  settled  states  it  may  be  even 
smaller,  it  may  be  a  city  ward.  Sometimes  this  dis- 
trict contains  only  a  few  hundred  inhabitants,  rarely 
over  five  thousand,  and  the  number  of  taxpayers  is, 
of  course,  very  much  less,  perhaps  a  fifth  or  an  eighth 
of  the  population.  Consequently  there  may  be  con- 
siderable common  knowledge  of  each  other's  affairs 
among  the  taxpayers,  at  least  outside  the  cities,  and 
the  assessors  may  be  assumed  to  have  some  knowledge 
of  the  property  which  they  are  to  assess  and  of  the 
value  thereof.  The  assessors,  for  there  are  often 
several  in  one  township,  are  elected  for  short  terms, 
one  year  or  two  years,  and  in  some  cases  perform 
their  official  functions  without  interrupting  their 
ordinary  vocations.  Their  work  can  usually  be  per- 
formed in  a  few  weeks.  In  short,  the  administration 
is  democratic,  springing  from  the  taxpayers  them- 
selves and  ever  under  their  control. 

There  are  many  variations  of  this  type.  There 
are  some  in  which  there  is  no  central  control  at  all, 
or  so  little  that  it  has  no  influence,  and  others  in 
which  the  administration  is  quite  highly  centralised. 
Between  these  two  extremes  are  many  variations  o/ 
degrees.     We  have   space  only  for  two  theXewEng- 

n  1      J       land  type. 

examples,   one   at   each  extreme,  Kiiocle 
Island  and  Indiana.     Rhode  Island  affords  an  excel- 
lent illustration,  possibly  the  best,  of  a  highly  de- 
centralised system.     Rhode  Island,  as  has  often  been 
pointed  out,  is,  as  a  state,  a  sort  of  federation  of  small 


254  INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 

towns,  each  retaining  a  degree  of  autonomy  and 
independence  greater  than  such  units  enjoy  anywhere 
else  in  the  country.  Here  the  state  has  very  few 
functions  to  perform,  and  the  "county"  is  a  mere 
grouping  of  towns  into  court  districts,  a  geographical 
rather  than  a  political  conception.  The  tax  for  state 
and  county  purposes,  the  county  expenses  being  met 
from  the  state  levy,  is  less  than  10  per  cent  of  the 
total  amount  raised  by  means  of  the  general  property 
tax.  Consequently  there  is  no  fiscal  reason,  or  at 
least  not  a  strong  one,  for  central  supervision.  The 
state  levy  was  until  very  recently  apportioned  roughly 
among  the  towns  at  long  and  irregular  intervals,  of 
about  sixteen  years  each,  by  a  sort  of  contractual 
agreement  between  the  towns  made  through  their 
representatives  in  the  legislature  and  taking  the  form 
of  law.  The  administration  of  the  tax  is,  therefore, 
almost  purely  a  matter  of  local  concern,  although  pro- 
vided for  by  a  general  statute.  Each  of  the  towns, 
many  of  which  contain  less  than  two  thousand  in- 
habitants, elects  each  year  in  town  meeting  not  less 
than  three  nor  more  than  seven  assessors,  also  a  tax 
collector.  The  assessors  are  all-powerful,  their  action 
nearly  final.  There  is  no  provision  for  review  or 
for  equalisation  between  individuals.  The  only  re- 
course an  aggrieved  taxpayer  has  is  to  take  the 
matter  into  the  courts.  Not  even  the  date  when  the 
assessment  is  to  be  made  and  to  which  it  applies 
is  fixed  for  the  state  at  large,  each  town  selecting 
these  to  suit  itself.      Such  is  the  extreme  of  the 


CHAP,  vill  PROPERTY    TAXES  255 

democratic   or   New    England   type  of   the  general 
property   tax. 

In  most  of  the  other  states  having  the  same  general 
type  of  this  tax  there  are  local  boards  of  review,  usu- 
ally   consisting    of    the    local    council, 

•  The  hegin- 

"  trustees,  '  with  power  to  revise  the  ningso/cen- 
assessments  made  by  the  assessor.  In  t^ai  control. 
still  others,  owing  primarily  to  the  greater  importance 
of  the  central  or  state  functions,  and  the  consequently 
larger  proportional  amount  of  state  taxes  to  be  ap- 
portioned, there  is  more  central  control.  The  cruder 
form  of  this  central  control  is  a  state  board  of  equal- 
isation with  limited  power  to  review  the  work  of  the 
local  assessors.  Such  boards  do  not,  as  a  rule,  change 
individual  assessments,  but  by  making  a  nominal 
valuation  for  each  township  or  tax  district  as  a  whole 
determine  the  amount  which  each  town  shall  pay  to 
the  state.  But  that  amount  is  apportioned  among 
the  individual  taxpayers  on  the  basis  of  the  original 
assessment.  Such  boards  as  these  are  virtually  ap- 
portioning boards  only.  A  fine*  example  of  this  is 
afforded  by  Michigan,  where  an  apportionment  of 
state  taxes  is  made  only  once  in  five  years,  and  each 
town  adds  to  its  tax  rate  enough  to  raise  its  quota  of 
the  state  tax.  There  is  thus  no  general  state  tax  rate. 
From  this  crude  form  of  centralisation,  which 
scarcely  affects  the  local  or  decentralised  ^^^  Indiana 
character  of  the  tax  administration  we  system  of  cen- 

, ,  T  tral  control. 

pass,  from  state   to  state,  through  vary- 
ing degrees  of  centralisation  until  we  come  to  those  like 


256  INTRODUCTION   TO  PUBLIC  FINANCE     part  n 

Indiana.  That  state  lias  the  old  general  property 
tax  almost  pure  and  undefiled  in  principle  and  theory, 
and  yet  has  a  very  powerful  central  controlling 
board.  The  original  assessment  is  still  made  by  a 
multitude  of  local  assessors  elected  and  acting  in  the 
small  townships.  But  these  assessors  are  supervised 
and  directed  by  county  assessors,  one  for  each  county, 
who  are  assisted  by  other  officers  and  act  as  the 
agents  or  representatives  of  the  central  or  state 
board.  By  conferences,  instruction,  and  sharp  super- 
vision, backed  by  the  right  to  discharge  assessors, 
the  central  board  exercises  a  very  effective  control 
reaching  down  into  each  township. 

There  are  two  controlling  reasons  for  this  develop- 
ment of  central  supervision.  The  first  is  that  the 
The  reasons  pi'oportionatc  amount  of  state  and  county 
forcentrai  taxcs  to  be  apportioned  is  greater.  Thus 
in  Rhode  Island,  as  we  have  seen,  the 
state  tax,  which  includes  county  taxes,  is  less  than  ten 
per  cent  of  the  total  tax,  while  in  Indiana  the  state 
and  county  taxes  amount  to  nearly  half  of  the  total 
taxes  on  property.  Clearly,  then,  any  inequalities  in 
the  valuations  between  the  different  towns  become 
at  once  of  great  importance.  If,  for  example,  a 
given  town  has  property  which  at  the  average  rate 
of  valuation  for  the  state  would  be  assessed  at 
$200,000  and  would  usually  pay,  say,  $2000  in  town 
taxes  and  12000  in  state  taxes,  should  make  its  valu- 
ation only  $100,000,  it  would  pay  in  town  taxes 
still  $2000,  but  would  pay  in  state  taxes  only  $1000. 


CHAi'.  VIII  PROPERTY    TAXES  257 


throwing  11000  unjustly  on  other  towns.  The 
other  controlling  reason  for  greater  centralisation  is 
the  existence  of  railroads  and  other  great  public  ser- 
vice corporations  whose  property  lies  in  many  town- 
ships. The  local  assessor  may  know  all  about  the 
value  of  farm  lands  in  his  little  town,  and  how  much 
a  cow  or  a  hog  is  v/orth,  but  he  cannot  possibly 
know  how  much  six  miles  of  railway  track,  part,  per- 
haps, of  a  great  transcontinental  railway  system,  are 
worth;  Such  properties  can  only  be  valued  as  part  of 
a  whole.  Hence,  the  application  of  the  so-called 
"  unit  rule  "  necessitates  a  state  board.  This  reason 
for  the  centralisation  of  the  administration  of  the 
general  property  tax  exists,  also,  in  states  not  having 
the  New  England  type  of  this  tax,  but  it  is  far  more 
potent  in  states  where  that  type  exists  because  of 
the  extreme  smallness  of  the  assessment  district. 

A  second  type  of  the  general  property  tax  is  found 
in  the  Southern  states,  and  may,  for  that  reason,  be 
called  the  Southern  type.  In  general,  it  The  Southern 
is  found  in  the  territory  south  of  the  Ohio  f^^i^^l^f^^^y' 
River  and  as  far  west  as  Louisiana.  It  is  tax. 
almost  everywhere  accompanied  by  an  extensive 
system  of  business  license  taxes  which  fill  in  certain 
gaps  in  the  general  property  tax,  and  hence  modify 
the  classes  of  property  to  be  included.  On  its  ad- 
ministrative side  it  has  been  determined  by  the 
county  system  of  local  government  which  exists  in 
those  states  where  it  is  in  force.  The  county  being 
a  very  much  larger  unit  of  local  government   than 


258  INTRODUCTION  TO  PUBLIC  FINANCE    part  il 

the  township,  both  in  population  and  territorial  area, 
its  government  is  necessarily  move  representative 
and  the  type  of  property  tax  developed  is  less  demo- 
cratic.  The  county  performs  all  the  functions  of_ 
local  government,  outside  of  the  cities  which  are 
usually  separately  incorporated.  The  county  reve- 
nues collected  from  the  property  tax  are  in  most 
cases  equalled  or  exceeded  by  those  collected  for  the 
state,  a  condition  almost  the  reverse  of  that  in  New 
England.  From  the  beginning  the  state  or  central 
government  loomed  larger  and  had  more  functions  to 
perform  in  the  South  than  in  the  North.  Ignoring, 
for  purposes  of  brevity,  the  differences  between  in- 
dividual states,  we  may  venture  to  generalise  as 
follows  :  Under  the  general  supervision  of  the 
county  court,  which  has  administrative  as  well  as 
purely  judicial  functions,  the  assessor  or  a  small 
board  of  assessors  makes  the  valuation  of  property. 
As  this  officer  cannot,  in  the  nature  of  things,  know 
many  of  the  taxpayers  whose  property  he  is  to  value, 
nor  much  about  values  in  portions  of  the  county  re- 
mote from  his  home,  his  duties  are  far  more  difficult 
than  those  of  the  town  assessors  in  the  North  and  very 
different  in  character.  Personal  declaration  by  the 
taxpayer  is  required,  at  least  by  law,  and,  in  general, 
more  respect  is  assumed  to  be  paid  to  the  values  de- 
clared by  him.  Penalties  for  failure  to  make  a  dec- 
laration are  more  severe  and  more  often  enforced. 
The  diligence  of  the  assessor  is  stimulated  by  com- 
missions, it  being  customary  to  compensate  him  by  a 


CHAP.  VIII  PROPERTY   TAXES  259 

percentage  of  the  taxes  levied.  Nevertheless  consid- 
erable property  escapes  and  it  is  not  uncommon  to  find 
so-called  "  back  tax  commissions "  or  other  officers 
authorised  to  assess  property  not  placed  on  the  rolls 
by  the  assessors.  These  commissions  are  more 
nearly  a  part  of  the  regular  machinery  of  government 
and  quite  unlike  the  guerilla  or  private  "inquisitors" 
of  Ohio,  to  which,  as  an  anomaly,  much  attention 
has  been  devoted. ^  There  is  also  a  more  pronounced 
tendency  in  these  states  to  use  the  general  machinery 
of  government  for  the  levy  and  collection  of  this  tax, 
and  not  to  create  a  special  and  entirely  separate  set 
of  officers.  •  Thus  the  sheriff  or  the  treasurer  is  often 
ex-officio  tax  collector.  State  supervisory  boards 
are  usually  composed  of  ex-officio  officers  of  the  state, 
such  as  the  governor,  the  auditor,  and  the  treasurer,  or 
the  attorney-general,  and  property  of  a  general 
character  like  the  railroads  is  assessed  by  them. 
Everywhere  else  in  the  country  the  rate  is  always 
determined  by  apportionment,  but  in  many  Southern 
states  a  proportional  (percentage)  rate  is  fixed  by  stat- 
ute and  changed  only  at  comparatively  long  intervals. 
The  third  and  last  type  is  the  Pacific  coast  type. 
This  prevails  in  the  states  on  and  west  of  the  Rocky 
Mountains,  and  in  a  modified  form  in  Texas.  Al- 
though, like  the  other  types,  it  takes  on  TU  Pacific 
various  forms,  yet  it  is  rather  more  uni-  IZtTprlp- 
form  than  the  other  two,  and  this  in  spite  erty  tax. 
of  the  tendency  of  the  people  of  this  part  of  the 
1  Carver,  Tax  Inquisitors  in  Ohio. 


260         INTRODUCTION   TO  PUBIIC  FINANCE    part  n 

country  to  experiment  with  weird,  fantastic,  and 
evanescent  theories.  This  type  resembles  the  South- 
ern type  more  than  the  New  England  type.  In  fact, 
the  State  of  Missouri  was  one  of  the  acknowledged 
sources  from  which  this  type  was  drawn.  It  differs 
from  the  Southern  type  more  in  spirit  and  traditions 
than  in  outward  form.  The  county  is  here  an  ad- 
ministrative district  of  the  state  government.  But 
the  county  has  less  autonomy  than  in  the  South,  most 
of  its  activities  being  directed  by  general  statutes 
under  the  supervision  of  state  officers  or  bureaus. 
In  New  England  and  in  the  South  authority  flows  to 
a  certain  extent  from  the  local  units  to  the  state,  in 
the  far  West  it  flows  only  from  the  state  down  to 
the  local  units.  The  state's  share  of  the  general 
property  tax  is  usually  about  one-third  of  the  whole, 
including  what  the  state  raises  for  the  purpose  of 
equalising  the  expense  of  maintaining  the  school 
system,  which  is  paid  over  to  the  counties  for  expend- 
ing, but  under  general  laws.  The  assessment  is 
made  by  a  county  assessor  elected  for  a  long  term, 
usually  of  four  years.  He  is  assisted,  usually,  by 
many  deputies  and  may  assign  them  districts.  Per- 
sonal declarations  by  the  taxpayers  are  required  by 
law,  but  very  irregularly  enforced.  The  county  ad- 
ministrative board  acts  as  a  board  of  review  or 
"equalisation"  as  between  individuals.  There  is 
always,  in  this  type,  a  state  board  of  equalisation 
whose  functions,  however,  differ  from  those  exercised 
by  boards  of  a  similar  name  in  the  states  of  the  East 


CHAP.  VIII  PROPERTY   TAXES  261 

and  of  the  Middle  West.  As  has  been  stated  above, 
those  Eastern  boards  usually  make  a  nominal  valua- 
tion for  the  purpose  of  apportioning  the  state  taxes, 
and  the  "  state  tax  rate "  resulting  may  differ  in 
every  town,  because  each  town  in  assuming  its  al- 
lotted quota  of  state  taxes  again  apportions  it  on 
the  basis  of  its  own  valuations.  That  is,  in  the  New 
England  type  the  valuations  placed  against  individ- 
ual properties  are  not  changed  by  state  board  action. 
In  the  Western  type,  if  the  state  board  of  equalisa- 
tion decides  that  it  is  necessary  to  raise  the  valuation 
in  a  given  county,  say,-10  per  cent,  that  10  per  cent 
is  added  to  each  individual  assessment  on  the  rolls, 
and  the  state  rate  is  the  same  for  every  county  and 
every  taxpayer.  The  county  "  rate "  might,  conse- 
quently, be  reduced  by  such  action.  Property  of  a 
general  character  like  railroads  is  assessed  by  a  cen- 
tral or  state  board,  usually  by  the  state  board  of 
equalisation. 

In  thus  marking  out  and  attempting  to  describe 
briefly  the  three  main  types  of  the  general  property 
tax    on    its  administrative    side  in    the    Ty^^^anqers 
United  States  the  writer  is  fully  aware   of  this  ciassi- 
that   he   is    treading   on   new    ground.    /^^"^*^^- 
He  is  also  keenly  conscious  that  his  broad  general- 
isations are  dangerous.     It  may  well  be  that  he  should 
have  made  a  fourth  group  of  states  like  Michigan, 
Minnesota,    Wisconsin,    and    Ohio,    which    present 
many   peculiarities.     It   may   be   possible    that   the 
differences  noted  are  not  the  most  distinctive  that 


262         INTRODUCTION  TO  PUBLIC  FINANCE    part  n 

might  have  been  selected.  His  purpose  was,  however, 
to  point  out  that  there  is  not  "  a  "  general  property 
tax  in  the  United  States,  but  fifty-one  different  prop- 
erty taxes,  which  fall  into  three  or  four  general 
groups.  Since  it  is  the  administrative  side  of  this 
tax  which  breaks  down  and,  as  we  have  seen,  since 
there  are  many  different  types  of  this  tax,  it  follows 
that  there  is  no  universal  remedy  for  the  existing 
evils. 

Sec.  3.  Passing  now  from  the  administrative  fea- 
tures, let  us  turn  to  the  content,  the  property  subject 
The  property  ^^  ^^^  ^^^'  '^^^  Statutes  quitc  generally 
subject  to  this  define  the  locus  of  the  taxable  property, 
the  time  at  which  its  value  and  amount 
shall  be  taken,  and  the  kinds  and  character  of  the 
property  to  be  included.  There  has  been  no  par- 
ticular difficulty  so  far  as  real  estate  is  concerned  with 
the  place  concept,  it  is  real  estate  within  the  town, 
or  the  county,  or  the  state  that  is  taxable  irrespec- 
tive of  the  residence  of  the  owner.  But  when  it  comes 
to  personal  property,  especially  to  intangible  personal 
property,  there  has  been  and  still  is  much  trouble, 
and  no  clear  principle  of  interstate  comity  has  yet 
emerged.  The  original  theory  was,  as  we  have  seen, 
that  this  tax  was  a  personal  tax,  and  that  theory  very 
naturally  adopted  the  legal  theory  that  personal  prop- 
erty takes  the  situs  of  its  owner.  But,  in  general, 
The  situs  of  the  practice  now  is  to  tax  personal  prop- 
property.  g^ty  where  found,  if  found  at  all,  and  the 
residence  of  the  owner  has  little   significance.     A 


CHAP.  VIII  PROPERTY   TAXES  26S 

notable  example  of  the  uncertainty  of  ideas  on  this 
subject  was  afforded  when,  a  few  years  ago,  the  state 
of  Vermont  expressly  exempted  all  personal  property 
outside  the  state  belonging  to  residents.  Although 
it  was  generally  assumed  that  this  was  done  from 
the  alleged  unworthy  motive  of  tempting  rich  New 
Yorkers  to  take  up  a  nominal  residence  in  Vermont 
and  thus  evade  taxation  in  New  York,  whose  laws 
make  the  situs  of  personalty  follow  the  owner,  yet 
this  action  merely  legalised  what  has  become  a  very 
general  practice. 

The  difficulty  of  determining  the  situs  of  personal 
property  is  the  reason  why  the  attempt  to  tax  stocks 
and  bonds  to  the  owner  has  been  practically  aban- 
doned, and  in  its  place  it  has  become  customary  to  tax 
the  property  represented  by  such  securities  to  the 
corporations,  and  to  ignore  the  stockholder. 

Many  anomalies  have  arisen  from  this  conflict  of 
the  theory  that  the  property  tax  is  a  personal  tax 
with  the  fact  and  practice  that  it  has  become  a  real  tax. 
A  very  pretty  illustration  of  this  is  afforded  in 
the  case  of  national  banks.  It  will  be  recalled  that  the 
national  banks  were  established  at  the  time  of  the 
Civil  War  to  aid  in  the  sale  of  the  federal  bonds,  and 
that  to  induce  the  national  banks  to  hold  these  bonds, 
those  banks  were  allowed  to  issue  notes  The  situs  of 
secured  by  the  bonds.     These  national  Personal 

^  .   .  .   ■,      'property  as 

bank-notes   came  into  competition  with  illustrated  by 
notes  issued  by  banks  chartered  by  the  ^«"^^  '''«^^- 
states.     To  drive  the  state   bank-notes  out  of   the 


264  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

way  and  to  thus  make  room  for  the  national  bank 
notes,  Congress  imposed  a  tax  of  10  per  cent  on  all 
bank-notes  except  those  of  national  banks.  It  had 
long  before  been  decided  by  the  courts  that  the 
states  could  not  tax  a  federal  bank  except  by  express 
grant  of  Congress.  It  was  feared  that  the  states,  if 
allowed  to  tax  national  banks  at  all,  might  retaliate 
by  prohibitive  or  discriminating  taxes.  Hence  Con- 
gress did  not,  in  the  first  act,  convey  to  the  states 
the  power  to  tax  these  banks.  Later,  however,  it  re- 
lented and  prescribed  a  method,  and  one  method  only, 
by  which  the  states  should  tax  national  banks.  In 
this  federal  statute  permitting  the  taxation  of  na- 
tional banks  we  find  embodied  the  prevailing  theory 
and  practice  of  the  property  tax  of  that  period. 
The  statute  says,  in  substance,  that  the  shares  of 
stock  in  national  banks  must  be  assessed  to  the  stock- 
holder, not  to  the  bank,  although  the  bank  may  be 
the  agent  of  the  stockholder  in  paying  the  tax,  also 
that  the  shares  must  not  be  taxed  at  a  higher  rate 
than  is  imposed  on  any  other  like  moneyed  capital. 
Then  to  prevent  double  taxation  which  might  have 
arisen  where  the  stockholder  resided  in  a  different 
state  or  town  from  that  in  which  the  bank  was  located, 
Congress  defined  the  situs  of  the  stock  as  in  the  place 
where  the  bank  was  located. 

It  is  hard  to  trace  the  origin  of  a  practice  which 
may  have  sprung  spontaneously  in  many  different 
places  from  similar  conditions  which  had  to  be  met. 
But  one  cannot  but  be  impressed  by  a  reading  of  the 


CHAP.  VIII  PROPERTY   TAXES  265 

statutes,  and  by  the  frequency  with  which  the  phrase- 
ology of  the  federal  law  is  repeated  therein,  with  the 
idea  that  this  law  has  had  a  great  deal  to  do  with 
destroying  the  theory  of  personal  situs.  On  the 
other  hand,  it  has  certainly  not  checked  in  the  least 
(except  so  far  as  the  banks  alone  are  concerned)  the 
very  general  tendency  to  regard  a  corporation  as  an 
artificial  person  and  to  levy  the  taxes  on  its  property 
.  without  reference  to  the  stockholders. 

The  time   element,  the  date  to  which  the  assess- 
ment  refers,    is  usually  defined   so  as  to  work  the 
practical  exemption  of  the  current  prod-   The  date  to 
ucts   of   land.     Thus  for  the  most  part  "'^^'^^  ^^; ««" 

^  sessment 

the  assessment  is  made  as  of  some  day  in  refers. 
the  winter  or  spring,  before  the  crops  of  tjie  year 
have  been  planted  and  long  after  the  crops  of  the 
year  previous  have  been  sold  and  taken  to  market, 
at  a  time,  that  is,  when  barns  and  warehouses  are 
empty.  This  strikingly  illustrates  the  prevailing 
American  conception  that  the  property  tax  is  a  tax 
on  capital,  not  on  income  or  revenue.  With  a  sort 
of  grim  humour  "  All  Fools'  Day  "  is  often  chosen  as 
tax  day.  Even  in  those  states,  mostly  among  those 
having  the  Southern  type  of  this  tax,  which  make 
the  day  to  which  the  assessment  refers  fall  in  the 
autumn,  the  crops  and  produce  of  the  year  are  usually 
expressly  exempted  by  law. 

The  property  included  in  the  base  of  this  tax  is 
most  commonly  defined  as  "  all  property,  real  and 
personal,  in  the  state  not  specifically  exempt."     The 


266  INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 

exemptions  will  be  discussed  below.  The  terms  "real 
The  terms  and  personal  property  "  are  most  com- 
"  ^^^^  ^^^^^  ",  monly  taken  in  their  ordinary  common  law 

and " personal  "^  "^ 

estate."  meaning.     But  this  is  by  no  means  the 

universal  rule.  In  many  cases  certain  items  are  arbi- 
trarily defined  "  for  purposes  of  taxation  "  as  real  or 
as  personal  property.  Ordinarily,  land  and  the  le- 
gally immovable  physical  improvements  thereon  are 
real  estate.  Certain  rights,  however,  attaching  to 
land,  mortgages  secured  on  land,  and  franchises  over 
lands  are  arbitrarily  called  real  estate  or  personal 
property  for  purposes  of  taxation,  irrespective  of 
their  common  law  character.  As  these  arbitrary  defi- 
nitions are  not  uniform  from  state  to  state,  they  give 
rise  to  considerable  confusion.  Sometimes  even  the 
following  of  the  common  law  principle  makes  curious 
shifting.  One  of  the  most  striking  illustrations  of 
this  is  the  classification  of  possessory  claims  to  govern- 
ment land  and  of  the  improvements  upon  it  as  the 
personal  property  of  the  settler  thereon  during  the 
five  years  that  he  is  acquiring  his  title,  and  before 
the  government  patent  has  been  issued.  The  census 
of  1890  published  tables  and  charts  which  made  it 
appear  that  the  then  "new"  State  of  Montana  had  a 
remarkably  high  proportion  of  personal  property 
and  comparatively  little  real  estate.  This  was  due 
in  large  part  to  the  above  classification.  The  arbi- 
trary nature  of  these  definitions  vitiates  almost  all 
direct  comparisons  of  the  statistics  of  assessments  be- 
tween different  states. 


CHAP.  VIII  PROPERTY   TAXES  267 

It  occasionally  happens  that  for  tax  administrative 
reasons  or  to  avoid  special  difficulties  arising  from 
some  peculiarity  of  the  law,  very  illogi-  Arbitrary 
cally  arbitrary  definitions  are  made,  definitions. 
Thus  telegraph  poles  and  lines  are  defined  in  one 
state  as  personal  property,  a  device  intended  merely 
to  give  the  assessor  an  extra  commission  ;  again, 
in  New  York  special  franchises  or  the  right  to  use 
the  public  streets  are  defined  as  real  estate.  The 
reason  for  this  latter  definition  is  that  in  that  state 
each  taxpayer  is  allowed  to  deduct  the  amount  of 
his  debts  from  the  entire  amount  of  his  personal  prop- 
erty, and  under  that  law,  if  franchises  were  defined 
as  personal  property,  the  corporations  owning  them 
would  deduct  their  bonded  indebtedness,  leaving 
nothing  taxable  on  the  franchise. 

Occasionally  certain  items  of  income  are  defined 
as  property  for  purposes  of  taxation.  These  in- 
stances are  usually  of  receipts,  like  those    j  , 

•^  ^     '  Income  de- 

from  ships  plying  in  foreign  water,  or  in-  fined  as  prop- 
surance   premiums,  or   brokers'  commis-  ^^^' 
sions,  which  are  not  represented  by  any  taxable  capital 
in  the  state.     This  is  a  survival  of  the  old  personal 
theory  of  the  property  tax. 

The  classes  of  personal  property  taxable  and  actu- 
ally taxed,  at  least  to  a  limited  extent,  are  usually 
household  and  office  furnishings,  stocks  of  goods  in 
shops  and  w^arehouses,  farm  tools,  machinery,  and 
live  stock.  Other  forms  of  personal  property  gener- 
ally taxable  according  to  law,  but  rarely  taxed,  are 


268         INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

money  and  credits.     The  moot  questions  in  regard 

to  the  taxation  of  the  latter  will  be  discussed  below. 

Sec.  4.    Property  exempt  from  taxation  comprises 

in  the  first  place  all  public  property,  also  greenbacks 

and  federal  bonds  exempt  by  federal  law. 

Property  ex-  ... 

emptfrom  The  Only  exception  here  is  that  in  a  few 
taxation.  states   public  property  may  be  included 

when  the  apportionment  of  state  taxes  is  made  to 
towns  or  other  assessment  districts.  Next  in  general 
extent  come  exemptions  granted  from  religious,  pious, 
charitable,  or  benevolent  reasons,  such  as  churches, 
cemeteries,  asylums,  and  homes  for  the  aged,  the  in- 
firm, and  widows.  The  breadth  and  extent  of  these 
exemptions  varies  considerably  from  state  to  state, 
but  even  in  the  most  meagre  cases  includes  all  church 
buildings  and  cemeteries.  An  interesting  extension 
of  this  idea  is  the  exemption  in  many  states  of  the 
secret  societies,  like  the  Masons  and  Odd  Fellows, 
on  the  ground  of  their  charities.  Another  very  gen- 
eral class  of  exemptions  comprises  those  for  educa- 
tional purposes,  such  as  schools,  colleges,  and  the  like, 
usually  only  those  endowed,  also  public  libraries,  and 
literary,  scientific,  and  philosophical  societies.  A 
smaller  group  is  composed  of  associations  like  agri- 
cultural societies,  volunteer  fire  companies,  and  others 
doing  some  work  assumed  to  be  of  a  public  character. 
Lastly,  there  are  many  miscellaneous  exemptions 
granted  for  social  or  economic  reasons  or  for  reasons 
relating  to  the  fiscal  administration;  among  these 
are  limited   amounts   of   certain  classes  of  persona] 


CHAP.  VIII  PROPERTY   TAXES  269 

property,  as  a  few  hundred  dollars'  worth  of  household 
furniture,  tools  of  mechanics  and  farmers,  a  limited 
amount  of  land,  machinery,  etc.,  for  promoting  new 
industries  for  a  limited  period  of  time.  But  there 
is  little  uniformity  among,  the  various  states  with 
reference  to  this  group  of  exemptions. 

In  general  it  may  be  said  of  the  exemptions  granted 
that  while  they  have,  of  course,  been  granted  only  to 
tliose  who  had  sufficient  political  influence  to  secure 
them,  they  do  not  in  any  but  a  very  few  exceptional 
cases  represent  an  abuse  of  political  power.  The 
motives  were  in  general  altruistic  or  for  the  public 
weal.  It  is,  furthermore,  a  thorough^  well-estab- 
lished principle  of  fiscal  law  that,  whenever,  and  in 
so  far  as,  any  such  property  yields  any  private  profit, 
it  loses  its  exemption. 

Sec.  5.  The  assessment  roll,  or  list  of  taxpayers 
with  their  taxable  propert}^,  is  usually  made  up  an- 
nually and  does  not  assume  the  form  of  a  fixed  ca- 
dastre in  any  of  the  states,  although  in  some  states  it 
approaches  that  form  slightly.  The  original  concep- 
tion of  the  tax,  as  a  personal  tax,  is  the  T^-he  assess- 
chief  reason  why  the  roll  usually  begins  ^^^  '^^^^ 
with  the  taxpayer  and  not  with  the  property,  and  the 
consequent  frequency  of  assessment  prevents  the  roll 
from  attaining  a  permanent  form.  In  the  case  of 
real  estate,  however,  there  is  here,  and  there  a  provi- 
sion which  contains  the  possible  germ  of  a  cadastral 
system.  In  a  few  states  real  estate  is  revalued  only 
once  in  four  years,  but  alterations  and  new  improve- 


270  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

ments  are  assessed  annually.  In  some  states  the 
county  surveyor  provides  maps  and  block  books  which 
the  assessor  uses  as  the  basis  of  his  work.  But  even 
in  those  states  there  is  little  permanence  imparted  to 
the  roll  by  this  practice.  Two  reasons  for  the  ab- 
sence of  a  cadastral  system,  especially  in  the  more 
recently  settled  states  and  in  those  parts  of  the  coun- 
try which  are  growing  rapidly  in  population,  is  the 
constant  and  frequent  change  in  ownership  of  land 
and  the  rapid  fluctuation  in  land  values. 

The  criterion  of  value  for  purposes  of  taxation  is 
always  the  selling  value,  and  rarely  the  rental  value. ^ 
The  criterion  The  reader  should  remember  that  there  is 
of  values.  practically  no  tenant  class  in  the  United 
States,  that  agricultural  land  is  for  the  most  part  cul- 
tivated by  its  owners,  or  by  tenants  who  expect  to 
become  landowners.  The  annual  value  of  the  use  of 
land  is  a  conception  rarely  used  in  business.  It  is  the 
capital  value  or  selling  value  that  is  almost  always  re- 
ferred to  and  used.  Lands  change  hands  with  consid- 
erable frequency,  and  with  great  ease  and  freedom. 
How  much  land  is  worth  per  acre  in  the  country  and 
per  square,  or  per  front,  foot  in  the  cities  at  purchase  is 
usually  a  better-known  fact  than  rental  values.  While 
admittedly  the  value  of  land  depends  on  the  prod- 
uct, yet  rental  values,  when  determined,  are  usually 
computed  on  the  basis  of  a  percentage  of  the  capital 

1  Delaware  and  New  Jersey  and  parts  of  Maryland  and  Pennsyl- 
vania offer  the  necessary  exceptions  to  prove  the  rule.  In  these  old 
states  rentals  are  considered. 


CHAP.  VIII  PROPERTY   TAXES  271 

values  rather  than  of  the  product.  Assessors  in  mak- 
ing up  their  rolls  depend  upon  prices  paid  when  trans- 
fers are  made,  or  upon  appraisements,  for  determining 
the  value  of  land,  and  rarely,  if  ever,  seek  any  infor- 
mation as  to  rentals.     This  is  equally  true    „  „. 

^  ''  h>elhng  valve 

of  city  real  estate  and  of  farm  lands.  In  vs.  rental 
the  same  way  boards  of  equalisation  in  at-  '^"^"^' 
tempting  to  check  up  the  work  of  assessors  investigate 
selling  prices,  and  not  rentals.  In  fact,  the  leasing  of 
land  is  so  rare,  and  usually  occurs  under  such  peculiar 
circumstances,  that  rentals  never  afford  a  satisfactory 
basis  of  valuation.  According  to  the  United  States 
Census  Bureau,  only  35  per  cent  of  the  farms  of  the 
country  are  cultivated  by  tenants,  but  among  these 
rented  "  farms  "  are  many  truck  farms,  dairies,  nursery 
gardens,  and  florists'  gardens  in  the  vicinity  of 
cities,  which  are  more  often  rented  than  is  agricul- 
tural land  proper.  Another  reason  why  rental  values 
are  not  used  for  taxation  purposes  is  that  in  many 
states  there  are  large  tracts  of  land  not  under  culti- 
vation. Less  than  50  per  cent  of  all  land  in  the 
United  States  is  "improved" ;  that  is,  under  cultiva- 
tion, and  less  than  three-fourths  of  that  actually  in 
farms  is  "improved."  Yet  the  unimproved,  unused 
land  has  a  selling  value  in  the  market,  and  is  tax- 
able. In  the  same  category  fall  the  unimproved  city 
lots,  held  for  speculation. 

The  use  of  the  selling  value,  or  a  capital  concept, 
instead  of  the  rental  value,  introduces  an  element  of 
uncertainty  into  the  assessment  or  valuation  of  land 


272  INTRODUCTION   TO  PUBLIC  FINANCE    part  n 

for  purposes  of  taxation.  A  great  deal  is  left  to  the 
discretion  of  the  assessors;  they  have  no  mathematical 
rule  which  they  can  follow.  In  the  British  property 
and  income  tax,  Schedule  A  is  the  most  sure  and  cer- 
tain group,  on  account  of  the  prevalence  of  a  univer- 
sal system  of  leasing,  and  in  the  German  states  the 
values  in  the  cadastre  can  be  fixed  with  a  high  degree 
of  certainty  and  accuracy  on  the  basis  of  annual 
rental  value  or  known  annual  produce.  Nothing  of 
that  sort  is  possible  in  the  United  States.  What  is 
"Full cash  usually  meant  by  the  terms  "full  cash 
vaiv^,r  value,"  or  "  true  value,"  is  perhaps  best 

defined  as  in  the  terms  of  the  California  statutes  "  the 
amount  at  which  property  would  be  taken  in  payment 
of  a  just  debt  from  a  solvent  debtor."  It  is  not  what 
would  be  paid  by  the  highest  bidder,  nor  what  the 
property  might  bring  at  a  forced  sale,  but  more 
nearly  what  it  would  be  appraised  at  in  the  settlement 
of  an  estate  for  division  among  the  heirs.  This 
conception  is  at  best  vague,  and  leaves  much  to 
the  discretion  of  the  officers.  Hence  it  is,  that 
in  order  not  to  err  by  excessive  valuations,  the 
assessors,  in  practice,  universally  fall  below  the  true 
Undervaiua-  value  as  defined  by  law.  In  states 
'*''^-  where  a  heavy  state  tax  is  apportioned 

on  the  basis  of  local  assessments,  there  is  a  further 
motive  for  undervaluation;  namely,  the  endeavour  on 
the  part  of  the  assessor  to  save  money  for  his  constit- 
uents by  evading  part  of  the  state  tax.  The  pre- 
vailing practice  of  undervaluation  has  been  recognised 


CHAP.  VIII  PROPERTY   TAXES  273 

by  law  in  some  states.  Thus  in  Illinois  only  one- 
fifth  of  the  true  value  is  to  be  entered  in  the  roll. 
But,  nevertheless,  undervaluation  goes  on  just  the 
same  and  the  20  per  cent  is  computed  on  less  than 
100  per  cent  of  the  true  value. 

Far  worse  than  the  general  undervaluations  which 
create  inequalities  between  districts  are  special  or 
individual  undervaluations.  These  are  in  inequalities 
rare  instances  the  result,  of  corruption  or  *^  valuation. 
conscious  favouritism;  more  often  they  arise  from  the 
natural  inertia  of  the  officials  who  do  not  make  the  roll 
keep  pace  with  the  changes  in  property  and  its  value. 
Various  devices  have  been  resorted  to,  to  obviate  or 
lessen  these  inequalities.  The  official  boards  of  re- 
view usually  become  mere  umpires  to  decide  disputes 
between  assessors  and  dissatisfied  taxpayers.  Some- 
what more  successful  in  cities  has  been  the  introduc- 
tion of  a  graduated  scale  of  values  in  each  block,  the 
inner  lots  being  valued  according  to  their  distance 
from  the  corner.  In  the  West  it  is  quite  common  to 
find  a  provision  to  the  effect  that  unimproved  land 
must  not  be  valued  at  less  than  improved  land  of 
the  same  quality  and  similarly  situated.  This  is 
doubtless  a  provision  suggested  by  Henry  George's 
theory. 

A  rather  important  provision,  as  tending  to  stimu- 
late the  assessor  to  take  greater  pains  in  his  work, 
is  that  which  requires  that  land  and  the  improvements 
thereon  shall  be  valued  and  assessed  separately.  This 
seems  to  have  originated  in  California.     It  has  re- 


274         INTRODUCTION   TO  PUBLIC  FINANCE      part  n 

cently  been  rediscovered  by  New  York,  and  adopted 
there  with  great  enthusiasm. 

The  assessment  of  personal  property  presents  the 
greatest  difficulties.  The  main  difficulty  is  to  find 
Assessment  i^.  Somc  kinds  of  tangible  personal  prop- 
of -personalty,  erty,  such  as  Cattle  and  animals  on  farms, 
wagons,  machiner}^,  tools,  etc.,  are  not  difficult  to  find, 
and  as  easily  valued.  In  states  where  there  are  large 
herds  of  cattle,  as  in  Nevada,  it  is  the  custom  for  assess- 
ors to  agree  upon  a  uniform  value  per  head.  House- 
hold furniture  can  as  easily  be  found,  but  difficulty 
at  once  arises  over  values.  In  every  state,  except 
New  York,  the  taxpayer  is  by  law  required  to  fill  out  a 
minute  inventory  of  all  his  furniture,  and  other  per- 
sonal property.  But  he  frequently  ignores  the  law, 
and  the  assessor  proceeds  by  a  sort  of  doomage  pro- 
cess, which  amounts  usually  to  a  guess  based  on  the 
general  character  of  the  house  the  taxpayer  lives  in, 
his  household  equipment,  and  his  general  financial 
standing.  In  New  York,  where  no  statement  is  re- 
quired, the  taxpayer  is  allowed  to  appear  on  "grievance 
day  "  and  "  swear  off  his  taxes,"  if  he  feels  that  the 
guess  made  by  the  assessors  is  too  high.  The  enforce- 
ment of  the  statement  and  the  reliance  placed  upon 
it  varies  from  state  to  state,  and  even  from  locality 
to  locality  within  each  state,  to  such  an  extent  that 
no  generalisation  can  be  made  with  safety.  It  is 
certainly  the  intention  of  the  law  that  every  taxpayer 
should  file  a  statement  of  his  entire  property,  and  the 
penalties  for  failure  to  do  so  are  severe.     But  it  is 


CHAP.  VIII  PROPERTY   TAXES  275 

equally  true  that  this  provision  is  not  uniform^  en- 
forced, and  that  the  vast  majority  of  the  statements 
filed  are  incorrect  and  incomplete.  These  statements 
usually  have  to  be  sworn  to  when  filed,  and  the  wide- 
spread perjury  and  consequent  contempt  of  law  con- 
stitute a  sad  and  a  menacing  feature  of  the  political 
life  of  the  country. 

Sec.  6.  One  of  the  moot  questions  in  the  United 
States  is  whether  credits  and  m^oney  should  be  con- 
sidered property  for  purposes  of  taxation.  7^^^  taxation 
The  debate  on  this  question  has  been  of  mortgages. 
especially  lengthy  in  connection  with  mortgages, 
because  they  are  usually  of  record,  or  will  be  reported 
by  the  borrower,  so  that  they  are  more  easily  discov- 
ered than  other  credits.  If  we  include  the  evanes- 
cent forms  of  discussion,  it  is  safe  to  say  that  there 
has  been  far  more  literature  on  the  taxation  of  mort- 
gages than  on  all  other  subjects  relating  to  taxation 
in  the  United  States. 

In  most  states  a  note  secured  by  a  mortgage  is 
taxable  as  property  of  the  mortgagee,  and  the  prop- 
erty which  secures  the  mortgage  is  taxable  to  the 
mortgagor  without  deduction  for  the  mortgage.  It 
is  obvious  that  this  procedure  rests  on  the  old  concep- 
tion of  the  general  property  tax  as  a  personal  tax.  The 
thought  of  the  legislator  is  that  the  lender  is  able  to 
pay  a  tax  by  virtue  of  the  interest  income  he  receives. 
That  in  most  cases  the  lender  will  reimbui'se  himself 
by  shifting  the  tax  to  the  borrower  in  the  form  of 
higher  interest  does  not,  in  the  opinion  of  the  legis- 


276         INTRODUCTION   TO  PUBLIC  FINANCE    part  n 

lator,  present  any  good  reason  why  an  attempt,  at 
least,  should  not  be  made  to  reach  the  lender.  The 
most  recent  departure  from  this  rule  is  to  impose  a 
special  tax  on  the  mortgage  of  the  nature  of  a  regis- 
tration tax  at  a  rate  considerably  lower  than  would 
be  the  result  of  taxing  it  as  property.  The  property 
by  which  the  mortgage  is  secured  is  then  taxed  in 
full  to  the  borrower.  This  is  in  substance  the  out- 
come of  the  long  struggle  in  New  York  State.  This 
method  assumes  that  the  holding  of  the  mortgage 
represents  taxpaying  ability  of  some  sort  vested  in 
the  lender.  It  is  not  unlike  the  conception  under- 
lying the  Prussian  law  which  imposes  an  additional 
tax  on  funded  income  in  the  form  of  a  property  tax, 
even  though  the  income  from  the  property  has 
already  been  taxed  as  part  of  the  taxpayer's  income. 
Another  solution  of  the  problem  is  to  treat  the  mort- 
gage as  an  interest  in  the  property  and  to  try  to 
divide  the  burden  between  the  two  parties.  This  in 
any  case  avoids  double  taxation.  In  California  the 
attempt  was  made  to  compel  the  lender  to  pay  the  tax 
by  at  least  making  him  advance  it.  It  became  evi- 
dent, however,  that  he  shifted  the  tax  to  the  borrower, 
whose  last  state  was  worse  than  his  first,  because 
he  had  to  pay  not  only  the  tax  but  the  cost  of 
shifting  as  well.  In  Massachusetts  a  similar  com- 
promise was .  made  in  that  the  mortgage  and  the 
surplus  of  the  property  over  the  mortgage  were 
assessed  separately,  one  to  the  lender  and  one  to  the 
borrower,  but  these  two  parties  were  allowed  to  agree 


CHAP,  vni  PROPERTY  TAXES  277 

who  should  pay  the  mortgage  tax.  Generally  the 
borrower  assumed  the  whole  burden  with  correspond- 
ing reduction  in  interest.  This  is  obviously  a  round- 
about way  of  accomplishing  a  very  simple  thing, 
lience  some  few  states  simply  ignore  the  mortgage 
entirely.  Thus  the  statutes  of  Washington  provide 
"  that  mortgages  and  all  credits  for  the  purchase  of 
real  estate  shall  not  be  considered  as  property  for  the 
purpose  of  taxation."  Recently  that  state  has  ex- 
tended the  same  principle  to  all  credits.  This  latter 
provision  simply  legalises  a  prevailing  practice,  for 
credits  other  than  mortgages  were  rarely  found  by 
the  assessor. 

It  is  the  law  in  most  of  the  states  (Washington  by 
recent  enactment  is  one  of  the  exceptions),  and  it  is 
prevailing  public  sentiment,  that  money  j.^^^^^^^  ^j 
on  hand,  or  on  deposit,  and  credits  are  money  and 
taxable  property.  But  it  is  only  in  rare 
instances  that  they  are  taxed.  Of  the  more  usual 
attempts  to  uncover  personal  property  of  this  class 
through  the  machinery  of  oaths,  affidavits,  and  the 
like.  Professor  Daniels,  in  his  work  on  Public  Fi- 
nance, says:  "The  effectiveness  of  such  laws  is  in- 
considerable. If  Jove  laughs  at  lovers'  vows,  he 
probably  guffaws  at  taxpayers'  oaths.  Even  the 
Psalmist's  hasty  allegation  of  universal  mendacity 
needs  little  qualification  in  this  province  of  finance. 
Where  the  taxpayer's  conscience  is  tender,  he  finds 
(as  one  puts  it)  that  virtue  is  perforce  its  own  re- 
ward.    This  phase  of  the  system  is  described  in  one 


278         INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

tax  report  as  'a  tax  upon  ignorance  and  honesty,' 
and  in  another  report  we  are  told  that  'the  payment 
of  the  tax  on  personalty  is  almost  as  voluntary  and 
is  considered  in  pretty  much  the  same  light  as  dona- 
tions to  the  neighbourhood  church  or  Sunday-school.'" 

There  are  two  consequences  of  this  almost  uni- 
versal evasion.  The  first  is  that  when  money  is 
loaned  under  circumstances  which  make  it  at  all 
likely  that  it  will  be  found  by  the  assessor,  the  rate  of 
interest  is  raised  above  what  it  would  otherwise  be 
by  an  amount  sufficient  to  cover  the  tax,  together 
with  another  extra  charge  for  the  cost  of  shifting 
and  attendant  risk.  The  second  is  that  any  "  igno- 
rant and  honest  taxpayers  "  who  may  report  this  class 
of  property  are  unduly  taxed.  It  seems,  then,  to  be 
futile  to  try  to  tax  this  class  of  property,  and  the 
underlying  reason  for  the  failure  to  reach  it,  and  for 
the  objection  which  p'eople  in  general  have  to  paying 
it,  18  probably  to  be  found  in  the  fundamental  fact  that 
it  should  not  be  taxed  at  all.  Although  credits  may 
be  included  within  the  term  "property,"  from  the 
point  of  view  of  law,  they  are  not  property  in  any  true 
economic  sense.  Like  money,  credits  are  represent- 
ative wealth. 

The  following  citation  from  the  report  of  the  Cali- 
fornia Commission  on  the  reform  of  the  revenue 
Credits  should  systcm  of  that  State  explains  this  point : 
not  he  taxed,  u  jf  ^^  take  the  view  that  the  property  tax 
should  be  a  real  tax,  based  upon  things  or  property 
without  respect  to  who  may  own  them,  then  it  is 


CHAP.  VIII  PROPERTY   TAXES  279 

illogical  to  regard  a  credit  as  property.  A  credit  is 
merely  a  right  on  the  part  of  the  creditor  to  receive 
and  to  enforce  payment  of  the  obligation  due  from 
some  other  person.  The  notes,  bonds,  or  other  docu- 
ments embodying  the  credits  merely  stand  as  evidence 
of  the  existing  contract.  The  very  existence  of  the 
documentary  proof  and  the  phraseology  in  which 
many  of  these  documents  are  couched  demonstrate 
very  clearly  that  the  creditor  himself  is  not  in  pos- 
session of  the  money,  or  lands,  or  the  goods  which 
secure  the  loan,  and  the  transfer  of  which  to  the 
debtor  brought  the  credit  into  existence.  The  cred- 
itor has  only  the  right  to  receive  these  things,  or 
similar  things,  back  at  some  future  time.  If  the 
United  States  government  borrows  1100,000,000 
upon  bonds,  —  which  are  merely  its  promise  to  pay,  — 
there  is  a  transfer  of  $100,000,000  in  gold  from  the 
buyers  of  the  bonds,  or  the  creditors,  to  the  United 
States  treasury.  The  creditors  who  hold  the  bonds 
feel  themselves  no  poorer  than  before,  but  no  one 
would  seriously  contend  that  by  this  simple  transac- 
tion the  property  or  wealth  of  the  country  has  been 
increased  a  particle.  There  is  only  1100,000,000  of 
real  wealth  involved,  which  has  passed  into  the  pos- 
session of  Uncle  Sam  from  that  of  his  creditors,  and 
which  will  be  returned  when  the  bonds  are  paid. 
Nor  would  any  one  seriously  contend  that  the  pay- 
ment by  the  United  States  of  some  of  its  indebted- 
ness and  the  cancellation  of  the  bonds  destroyed  any 
wealth.     Standing  against  every  credit  there  is  an 


280  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

equal  amount  of  indebtedness,  and  the  maturing  of 
this  indebtedness  destroys  no  material  wealth,  noi 
does  its  creation  add  anything  to  the  material  wealth 
of  the  world  or  to  the  substantial  property  which  has 
to  bear  the  burden  of  taxation.  To  consider  that 
credits  are  property  as  well  as  the  goods  and  other 
property  by  which  they  are  secured  is  like  adding 
together  two  sides  of  an  account  —  the  assets  and  the 
liabilities.  To  treat  credits  as  property,  and  also  the 
lands,  goods,  and  other  forms  of  wealth  in  the  hands 
of  the  community,  would  result  in  an  obvious  dupli- 
cation of  values,  and  if  taxes  were  levied  upon  that 
basis  would  result  in  double  taxation,  unless  the 
debtor  were  allowed  to  deduct  the  amount  of  his 
debts  in  the  same  way  that  we  permit  him  to  do  in 
the  case  of  mortgages.  But  the  existing  laws  do  not 
usually  permit  that,  save  and  except  that  the  debtor 
may  deduct  his  debts  from  the  amount  of  his  credits. 
Illustrations  of  the  way  in  which  the  taxation  of 
credits  works  objectionable  double  taxation  might  be 
multiplied  and  the  argument  extended  indefinitely, 
but  the  above  illustrations  ought  to  be  sufficient  to 
make  clear  the  fundamental  principles  involved." 

Sec.  7.  As  has  been  stated  above,  corporations, 
when  subject  to  the  general  property  tax,  are  gener- 
Taxationof  ^^^^  regarded  as  legal  persons  and  are 
corporation  taxed  in  the  same  manner  as  any  other 
jranc  ises.  persons.  A  Special  difficulty  is  involved 
in  the  taxation  of  the  so-called  intangible  personal 
property  of  the  corporations.     This  class  of  property, 


CHAP.  VIII  PROPERTY   TAXES  281 

sometimes  called  "the  franchise,"  sometimes  "the 
corporate  excess,"  and  often  simply  "  the  intangible 
property,"  is  the  capitalised  value  of  that  part  of  the 
net  earnings  that  is  in  excess  of  a  reasonable  return 
on  the  amount  invested  in  the  real  estate,  machinery, 
and  other  tangible  property  of  the  corporations.  Its 
value  for  purposes  of  taxation  is  usually  obtained  by 
ascertaining,  first,  the  value  of  the  real  estate  and  other 
tangible  property;  second,  the  aggregate  market 
value  of  the  stock,  bonds,  and  other  funds  represent- 
ing the  property;  and  third,  by  deducting  the  first 
from  the  second.  The  remainder  is  assumed  to  be 
the  value  of  the  intangible  property.  When  the 
market  value  of  the  securities  cannot  be  ascertained, 
the  net  earnings  are  capitalised  in  order  to  ascertain 
the  aggregate  value  of  the  property.  This  whole 
process  presents  great  difficulties  and  leaves  much  to 
the  discretion  of  the  assessing  officials. 

The  legal  theory  is  that  this  excess  value  is  the 
value  of  a  class  of  property  called  the  franchises,  con- 
ferred upon  corporations  by  governmental  authority. 
The  courts  have  defined  franchises  as:  "special  privi- 
leges conferred  by  government  on  individuals  and 
which  do  not  belong  to  the  citizens  of  the.  country 
generally  by  common  right. "^  As  these  franchises 
are  legally  property,  they  are  included  in  the  taxable 
property.  It  is  generally  recognised  that  there  are 
three,  or  possibly  four,  different  kinds  of  franchises 

1  Such  franchises  are  not  to  be  confused  with  the  right  to  exer- 
cise the  electoral  power. 


282  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

that  enter  into  and  contribute  to  the  corporate  excess. 
But  the  attempt  to  assess  or  value  them  separately  is 
rarely  made,  and  in  the  nature  of  things  is  not  suc- 
cessful. Their  value  merges  in  one  mass  vrith  othei 
elements  analogous  to  "good- will,"  and  the  only 
practical  method  of  valuation  is  to  treat  them  as  a  unit. 
The  first  of  the  franchises  recognised  by  the 
courts  is  the  right  "  to  be  "  a  corporation,  a  privilege 
The  right "  to  accorded  to  any  three  or  more  persons 
^^•"  who  associate  together  in  the  manner  pre- 

scribed by  law  for  the  formation  of  private  corpora- 
tions. This  franchise  conveys  the  right  to  use  the 
corporate  name,  to  have  a  corporate  seal,  to  sue  and 
be  sued,  and  in  general  to  enjoy  the  privileges  ordina- 
rily permitted  to  corporations.  While  this  franchise 
is  theoretically  included  with  the  others  in  the  corpo- 
rate excess,  it  is  also  subject  to  a  fee  at  the  time  it  is 
granted  and  may  also,  together  with  the  second,  be 
subject  to  an  annual  fee-like  tax,  in  addition  to  the 
taxes  imposed  upon  it  as  part  of  the  property.  These 
charges  may  be  uniform  or  they  may  be  graduated. 
The  second  sort  of  taxable  franchise  is  called  the 
The  right 'Ho  franchise  *'to  do  and  to  act."  This  is 
^"•"  inevitably  conferred  at  the  same  time  as 

the  first  mentioned  and  is  but  slightly  different  in 
Special  and  character.  Third,  the  revenue  laws,  as 
general  fran-  interpreted  by  the  courts,  seem  to  recog- 
nise two  other  kinds  of  franchises,  which 
we  may  call,  for  convenience,  special  and  general,  but 
they  are  so  closely  analogous  as  to  be  exceedingly 


CHAP.  VIII  PROPERTY   TAXES  283 

difficult  to  distinguish  one  from  another.  These  are 
both  subject  to  taxation  as  property,  and  are  included 
in  the  assessment  of  the  property  of  the  corporations. 
One  of  these  franchises  requires  a  special  grant;  the 
other  is  acquired  automatically  under  the  enjoyment 
of  the  powers  conferred  by  the  general  law  for  incor- 
poration, and  is,  as  will  be  explained  below,  very 
closely  akin  to  '* good-will."  These  two  classes  of* 
franchises  are  here  grouped  together  and  treated  as 
one  class,  simply  because  they  are  to  be  valued  for 
purposes  of  taxation  in  practically  the  same  manner. 

The  first  of  all  to  be  recognised  as  taxable  fran- 
chises were  the  special  franchises  enjoyed  by  public- 
service  corporations,  such  as  water  companies,  gas 
companies,  street  railway  companies,  and  the  like, 
which  use  the  public  streets,  under  some  special  per- 
mission. These  are  "  special  "  in  the  sense  that  they 
have  to  be  specifically  described  in  each  case  and 
cannot  be  conveyed  by  general  statute,  and  they 
virtually  convey  the  right  to  use  some  public  prop- 
erty. They  are  often  ver}^  valuable,  and  that  they 
were  so  was  early  recognised. 

From  the  practice  of  assessing  these  special  fran- 
chises there  grew  up  the  practice,  which  has  fre- 
quently been  sanctioned  by  the  courts,  of  assuming 
that  every  class  of  corporations  enjoys  a  sort  of 
general  franchise  that  is  distinct  from  the  mere  right 
to  be  a  corporation,  or  to  act  as  a  corporation. 
Thus  banks  have  been  taxed  for  their  "  franchises  " 
and  their  value  ascertained  in  the  manner  described 


284         INTRODUCTION  TO  PUBLIC  FINANCE    part  il 

above.  While  these  two  classes  of  franchises,  which 
for  convenience  we  have  called  the  special  and  the 
general,  are  apparently,  in  the  opinion  of  the  courts, 
almost  precisely  alike  and  are  treated  in  the  same 
manner  for  the  purposes  of  taxation,  they  are,  from 
the  economic  point  of  view,  fundamentally  different. 
The  franchise  of  a  bank,  in  this  sense,  is  closely 
analogous  to  that  kind  of  property  known  as  "  good- 
Certain /ran-  will."  This  is  a  class  of  property  which 
chvses  ana  o-     presumably  miffht  be  taxed  as  property, 

gous  to     good     ^  ./  o  r      l         j  ^ 

wui."  but  which  as  a  rule  is  never  taxed  except 

in  those  cases  in  which  it  is  enjoyed  by  corporations, 
and  then  it  is  taxed  as  a  franchise.  It  is  a  question, 
open  for  serious  consideration,  whether  the  taxation 
of  such  a  franchise,  tantamount  to  the  taxation  of 
the  good-will,  against  corporations,  while  similar 
items  of  property,  if  this  be  property,  are  not  assessed 
against  individuals  and  firms,  does  not  constitute  an 
unjust  discrimination  against  corporations. 

Sec.  8.  The  general  property  tax  has  been  sub- 
jected to  severe  criticisms  and  has  frequently  been 
condemned.  We  may  now  examine  the  grounds  on 
which  this  condemnation  rests.  Among  many  there 
are  two  of  great  importance.  (1)  It  is  urged  that 
the  tax  is  unjust  because  property  forms  no  criterion 
Objections  to  oi  tax-payiug  ability.  It  is  maintained 
this  tax.  ^\^^^  income  is  a  far  better  basis.     (2)  It 

is  urged  that  the  general  property  tax  is  inexpedient 
because  so  difficult  to  administer  justly,  especially  in 
the  matter  of  the  discovery  and  assessment  of  per- 


^ 


CHAP.  VIII  PROPERTY   TAXES  285 

sonal  property  and  because  of  its  effect  on  the  move- 
ment of  capital  and  forms  of  investment.  Against 
these  serious  objections  it  is  urged  that  when  there 
is  a  tolerably  just  system  of  income  taxation  already 
in  existence,  a  property  tax  in  addition  thereto  fulfils 
the  requirements  of  justice  because  it  imposes  a 
heavier  burden  on  "  funded "  income,  which  is  re- 
garded as  indicative  of  more  faculty,  since  it  is  less 
precarious.  It  also  supplements  the  income  tax  by 
making  property  in  enjoyment,  the  use  of  which  is 
an  indication  of  tax  faculty,  a  part  of  the  base,  as,  for 
example,  picture  galleries.  And,  lastly,  the  com- 
parative steadiness  of  the  return  from  the  property 
tax  is  a  great  recommendation  from  the  fiscal  stand- 
point. It  would  seem,  then,  that  the  objections  to 
the  general  property  tax  as  the  main  part  of  a  sys- 
tem may  still  stand,  but  that  there  may  whenihistax 
be  room  for  such  a  tax  as  a  subordinate  *«  justifiaUe. 
part  of  a  larger  system,  the  demands  of  justice  being 
met  by  the  proper  relation  between  the  different 
parts  of  the  system.  In  Switzerland  and  Prussia  the 
general  property  tax  is  part  of  a  more  elaborate  sys- 
tem. In  the  United  States  it  stands  almost  alone 
for  commonwealth  purposes,  supplemented  in  some 
states  by  other  taxes  intended  to  reach  certain  forms 
of  revenue-yielding  property.  The  universal  con- 
demnation of  the  American  commonwealth  general 
property  tax  is  therefore  not  due  to  the  defects  in 
the  tax  itself,  but  mainly  to  the  fact  that  it  is  not 
properly  supplemented  by  other  taxes. 


286         INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 

The  first  question  that   arises  when    the  general 
property  tax  stands   alone,  and   a   question  which, 
although  not  so  prominent,  also  arises  in  other  cases, 
Can  the  as-       is :    Can    the  method   of   assessment   be 
roveriy  made  sutiiciently  enective  to  reach  uni- 

madeT  fomily  and  equitably  all  forms  of  prop- 

erty, especially  personal  property?  The  answer  to 
this  question  that  has  been  given  by  the  experience 
of  the  United  States  is  emphatically  in  the  negative. 
This  is  especially  true  when  the  administration  of 
the  assessment  is  left  to  officials  popularly  elected 
for  a  short  term,  in  small  districts,  and  by  the  tax- 
payers whose  property  they  are  to  assess.  It  is  also 
in  the  negative,  but  somewhat  less  unanimously  so, 
when  the  assessment  is  under  the  control  of  an 
impartial  bureaucracy  appointed  by  some  higher 
authority  and  not  beholden  to  a  local  constituency. 
In  the  one  case  the  assessor  is  apt  to  be  too  friendly 
to  the  assessed,  in  the  other  too  ignorant  of  local 
conditions. 

Much  light  is  thrown  upon  the  question  of  assess- 
ment by  the  experience  of  the  United  States.  In 
1890,  and  again  in  1900  and  in  1904,  the  United 
States  censns  office  undertook  to  ascertain  the  true 
value  of  property,  i.e.  its  fair  selling  value.  This 
Assessment  in  ^^^^^^  ^^  ^  ^^^^^  of  Comparison  for  the 
the  United  asscsscd  valucs.  The  investigations  of 
the  census  were  conducted  with  the  ut- 
most care,  and  although  they  inevitably  contain 
many  unavoidable  sources  of  error,  they  are  yet  very 


CHAP.  VIII  PROPERTY   TAXES  287 

serviceable.  The  following  tables  show  the  results 
of  the  investigations  into  the  true  value  of  prop- 
erty: 

1890 

Real  estate,  with  improvements  thereon    .        .  $39,544,544,333 

Live  stock  on  farms,  farm  implements,  and  ma- 
chinery          2,703,015,040 

Gold  and  silver  coin  and  bullion        .        .        .       1,158,774,948 

Mines  and  quarries,  including  product  on  hand      1,291,291,579 

Machinery  of  mills,  and  product  on  hand        .       3,058,593,441 

Railroads  and  equipments,  including  street  rail- 
roads     8,685,407,323 

Telegraphs,   telephones,  shipping,   canals,  and 

equipment 701,755,712 

Miscellaneous      .        .        .        ....      7,893,708,821 

Total     . $65,037,091,197 

The  total  assessed  valuation  in  1890  was  125,473,173,418,  or 
about  40  per  cent  (41  per  cent  if  we  allow  for  $3,833,835,225 
exempt  by  law).  Of  real  estate,  —  land  and  its  improve- 
ments,—the  true  value  was  $39,544,544,333,  of  which  all  but 
$3,833,335,225  was  legally  subject  to  taxation ;  the  assessed 
value  of  the  $35,711,209,108  taxed  was  $18,956,556,675,  a  little 
over  50  per  cent  of  its  true  value.  The  $25,492,546,864  of 
personal  property  was  assessed  at  $6,516,616,743,  about  25  per 
cent.  But  if  we  make  allowance  for  the  $1,291,291,579  worth 
of  mines  and  quarries  which  might  be  well  classed  as  real 
estate,  personal  property  was  assessed  at  about  22^^  per  cent 
of  its  true  value.  As  the  statement  of  the  total  amount  of 
personal  property  erred  admittedly  on  the  side  of  moderation, 
there  being  some  forms  which  were  not  ascertainable,  this 
showing  was  more  favourable  to  the  assessment  than  the  truth 
would  have  been.  It  is  well  within  the  truth  to  say  that  in  the 
United  States  as  a  whole  not  more  than  20  per  cent  of  personal 
property  was  taxed  in  1890.     Probably  considerably  less  than 


288         INTRODUCTION   TO  PUBLIC  FINANCE    part  il 

this  is  the  true  figure.  In  many  important  commonwealths  the 
assessment  of  personal  property,  even  according  to  the  favour- 
able showing  of  the  census,  was  far  below  the  average  for  the 
whole  country.  In  the  country  as  a  whole,  personal  property 
is  about  71  per  cent  of  real  estate,  or  41y%  per  cent  of  all  taxed 
property.  In  New  York  it  was  assessed  at  a  trifle  over  11  per 
cent  of  the  real  estate  and  about  10  per  cent  of  all  property. 
According  to  the  census  valuation,  there  was  in  New  York  in 
1890  15,817,704,667  worth  of  real  estate  and  82,758,997,324 
worth  of  personal  property.  Real  estate  was  assessed  at 
$3,403,751,246,  or  about  58  per  cent  of  its  real  value,  while 
personal  property  was  assessed  at  $382,159,067,  or  not  quite 
14  per  cent  of  its  real  value.  When  it  is  remembered  that  the 
census  report  omitted  some  unascertainable  items  of  personal 
property,  it  is  fair  to  say  that  90  per  cent  of  the  personal  prop- 
erty in  New  York  was  untaxed,  where  at  the  same  time  only 
42  per  cent  of  real  estate  was  untaxed.  This  means  that  the 
assessment  of  personal  property  was  being  evaded  and  that  real 
estate  was  assessed  below  its  actual  value.  The  latter  fault  is 
not  so  bad  as  the  former,  because  general  under-assessment 
means  merely  a  higher  rate  than  would  otherwise  prevail,  but 
does  not,  if  uniform,  affect  the  distribution  of  the  burden. 
Pennsylvania,  Massachusetts,  and  Ohio  showed  a  somewhat 
better  assessment  of  personal  property.  Thus  in  Pennsylvania 
the  assessed  value  of  personal  property  was  618  millions  against 
2042  millions  of  real  estate;  Massachusetts,  554  millions 
against  1600  millions;  Ohio,  546  millions  against  1232  millions. 
But  no  one  supposes  that  there  was  any  more  personal  property 
owned  in  these  commonwealths  than  in  New  York.  In  fact, 
the  contrary  was  the  case.  In  some  of  the  newer  Western 
states  the  assessment  of  personal  property  was  larger  than  the 
assessment  of  real  estate.  Thus  in  Montana  personal  property 
was  valued  at  58  millions,  real  estate  55  millions;  in  Wyoming 
the  ratio  was  20:13;  New  Mexico,  28:15;  Arizona,  18:10; 
Nevada,  17:9;  Idaho,    16:10.     But  this  is  easily  explained. 


CHAP.   VIII 


PROPERTY  TAXES 


289 


1890 


ASSESSED  VALUATION  OF  PROPERTY  TAXED. 

Real  Estate. 

states. 

Personal 
Property. 

000 
,000 
,000 
,000 
,000 
,000 

1 

000, 
,000, 
,000, 
,000 
,000, 
,000 

g 

000, 
,500, 
,000, 
,600, 
,000, 
600, 

8 

^ 

^ 

= 

= 

B 

m. 

2 

■i           N.Y.            ■ 

=4 

— T 

— 

■ 

■1 

= 

= 

■i          PENN.         ■ 
^          MARR.          ■ 
1^           OHIO           ■ 
^m           CAL.           ■ 

:= 

■ 

■ 

1 

iH            MICH.           ■ 
IB             MO.            I 

1 

^              ILL.             ■ 

:. 

1 

^             N.J.             I 

■■             IND.             ■ 

■  1 

^         TEXAS          ■ 

1 

■1            MINN.           1 

^            WIS.             ■ 

^   .         MD.             ■ 

^             KY.             ■ 

1 

■ 

^            IOWA          I 

■H          TENN.          1 

^1             VA.            ■ 

■1         CONN.          ■ 

^            R.L            1 

iH           KAN.           I 

^            ME.             1 

§       i        i       11 

■i             GA.             I 

■ 

§     1"     §     i  § 

■          WASH.          1 

■       LA.       r 

,000 

000 

,000 

000 
000, 

■          COLO.          1 

?          8          S          S    - 

■  ALA.           I 

■  N.C.            I 

^ 

^^ 

^^ 

Real  Estate 
Personal 

Real  Estate 

■  N.H.            I 

■  W.'vA.          1 

■  MISS.          1 

■  NEB.           1 

ts 

Ha 

£ 

■ 

t^ 

1_ 

As! 

ess'm 

" 

■             VT.            1 

Personal 

■  ARK.           1 

■  OREG.         1 

■  8.D.           1 
1          8.C.           1 
1         UTAH 

1          N.D.           1 

1           DEL.           1 

1            TLA.           1 

1          MONT.         ■ 

1            N.M.           1 

1           WYO.          1 

1           ARIZ.          1 

IDAHO        1 

NEV.          [ 

1 

290  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

(1)  In    these    states,    land    values    had    not   yet    developed. 

(2)  The  real  property  assessed  was  only  such  lands,  with  their 
improvements,  as  had  fully  passed  into  the  hands  of  private 
owners.  (3)  Personal  property  was  swelled  by  including  in 
it  the  improvements  upon  public  lands,  the  fee  to  which  was 
still  vested  in  the  United  States,  and  upon  railroad  lands  the 
title  to  'which  was  still  vested  in  the  railroad  companies. 
(4)  The  list  of  personal  property  was  swelled  by  the  nature  of 
some  of  the  ihdustries  that  prevail,  — cattle.  A  certain  amount 
of  it  was  due  to  the  assessment  of  railroad  property  as  personal 
property.  (5)  The  possibility  of  concealing  property  is  less 
in  a  country  where  population  is  sparse  and  the  conditions  for 
investment  well  known  to  the  assessors.  (6)  The  need  of 
revenues  was  very  great,  and  real  estate  had  not  enough  value 
to  bear  the  burden.  Personal  property  had,  therefore,  to  be 
called  in  to  raise  th6  necessary  amount  without  inordinately 
high  rates.  The  chart  on  the  preceding  page  taken  from  the 
Eleventh  Census  shows  the  relative  assessment  of  personal  and 
real  property  in  all  the  states  in  1890. 

In  matters  of  larger  import  the  conditions  revealed 
by  the  investigations  of  1900  and  of  1904  are  not 
materially  different  from  those  in  1890.  Hence  the 
foregoing  comments  are  practically  true  to-day. 
The  new  figures,  for  reasons  that  were  unavoidable, 
are  not  strictly  comparable  with  the  old,  but  they 
are  somewhat  better  in  themselves  and  may  be  re- 
garded as  more  reliable. 


CHAP.  VIII  PROPERTY   TAXES  291 

Estimates  of  Wealth  for  1904  and  1900 


Form  of  Wealth 


Total 

Real  property  and  improvements 

taxed  

Real  property  and  improvements 

exempt 

Live  stock 

Farm  implements  and  machinery  . 
Manufacturing    machinery,    tools, 

and  implements 

Gold  and  silver  coin  and  bullion  . 
Railroads  and  their  equipment  .  . 
Street  railways,  etc. : 

Street  railways 

Telegraph  systems 

^   Telephone  systems 

Pullman  and  private  cars  .  . 
Shipping  and  canals  .... 
Privately  owned  waterworks  . 
Privately  owned  central  elec- 
tric light  and  power  stations 
All  other : 

Agricultural  products .... 
Manufactured  products  .  .  . 
Imported  merchandise     .     ,     . 

Mining  products  , 

Clothing  and  personal  adorn- 
ments   

Furniture,  carriages,  and  kin- 
dred property 

Taxable 

Exempt 

Assessed  valuation  of  taxable  prop- 
erty      

Percentage  of  assessed  valuation  to 
the  true  value  of  property 
taxable 


1904 


$107,104,192,410 
55,510,228,057 

6,831,244,570 

4,073,791,73(7 

844,989,863 

3,297,754,180 

1,998,603,303 

11,244,752,000 

2,219,966,000 
227,400,000 
585,840,000 
123,000,000 
846,489,804 
275,000,000 

562,851,105 

1,899,379,652 

7,409,291,668 

495,543,685 

408,066,787 

2,500.000.000 


1900 


$88,517,306,775 
46,324,839,234 

6,212,788,930 

3,306,473,278 

749,775,970 

2,541,046,639 
1,677,379,825 
9,035,732,000 

1,576,197,160 
211,650,000 
400,324,000 
98,836,600 
537,849,478 
267,752,468 

402,618,653 

1,455,069,323 

6,087,151,108 

424,970,592 

326,851,517 

2,000,000,000 


5,750,000,000    4,880,000,000 


100,272,947,840 
6,831,244,570 

38,963,381,120 


36.4 


82,304,517,845 
6,212,788,930 

31.280,332,443 


35.3 


In  1900  personal  property,  including  railroads,  street  rail- 
roads, telegraph  and  telephone  systems,  and  privately  owned 


292  INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

waterworks,  and  electric  light  and  power  stations,  which  are 
better  assessed  than  most  other  classes  of  property  included, 
was  assessed  at  22  per  cent,  and  in  1904  at  19.8  per  cent  of  its 
true  value,  as  against  44.4  and  48  per  cent  for  real  estate  in  the 
respective  years. 

The  failure  to  assess  personal  property  in  the 
United  States  is  due  largely  to  the  laxity  of  admin- 
The  failure  to  istration  *,  the  tax  laws  on  the  subject 
reax^h  personal  are  usually  strict  euough  to  answer  every 
^■m  to  faults  requirement.  What  constitutes  personal 
in  the  laws.  property  is  explicitly  stated ;  the  assess- 
ors have  ample  power  to  ascertain  its  exact  amount. 
In  all  but  one  of  the  commonwealths  the  taxpayer 
is,  or  may  be,  required  to  make  a  declaration  of  his 
property.  In  all  the  states  the  assessors  have  the 
advantage  of  large  powers  of  investigation,  and  can 
ascertain  the  amount  of  the  property  if  they  will 
assert  their  power.  But  this  is  what  locally  elected 
assessors  are  very  reluctant  to  do.  Much  improve- 
ment has  resulted  in  a  few  states  from  the  introduc- 
tion of  strong  central  controlling  boards.  But  this  has 
not  been  in  force  long  enough  to  enable  us  to  deter- 
mine how  permanent  this  improvement  is  likely  to  be. 

The  advisability  of  extending  the  assessment  to 
legal  persons  so  as  to  cover  a  certain  amount  of 
The  assess-  property  that  might  escape  in  the  guise 
ment  of  legal     ^f  personal  property  depends  upon  the 

persons  under  ^  i.       i         ./  j.  l 

the  general  strictuess  ill  the  asscssmeut.  The  stocks 
property  tax.  ^^^  bonds  of  railroad  companies  are 
easily  concealable  personal  property  of  the  individual 
stockholder.     But  the  road  and  buildings  are  easily 


CHAP.  VIII  PROPERTY   TAXES  -293 

ascertainable  real  property  of  the  companies.  For 
ease  of  assessment,  therefore,  it  is  best  to  tax  legal 
persons  as  well  as  real  persons.  But  in  that  case 
stocks  and  bonds  in  the  hands  of  private  persons 
should  be  exempt,  unless  it  is  intended  to  tax  such 
property  more  heavily  than  other  property ;  i.e.  to  in- 
troduce a  partial  progression.  Whether  in  addition 
to  including  legal  persons  in  the  general  property 
tax  a  special  corporation  tax  should  be  imposed  is  a 
question  of  policy  affecting  the  whole  tax  system. 

When  the  general  property  tax  stands  alone,  all 
tax  faculty  that  exists  in  the  form  of  receipts  of  the 
economic  character  of   wages  —  salaries,   The  taxation 
fees  for  professional  services  in  indepen-  ^f  faculty  %n 

^  -^  the  farm  of 

dent  professions,  profits  and  earnings  of  wages  not  ac- 
management  —  are    untaxed.       In    the  ^owp^ts/ied. 
earlier   forms   of   the   property   tax   in   the  United 
States   this   omission  was   seen,  and   a   special   tax 
levied   upon    such    income.       But   at   present   that 
method  of  taxation  has  almost  entirely  disappeared. 

Sec.  9.    The  property  tax  as  the  sole  or  chief  form 
of  direct  taxation  has  few  supporters  among  scien- 
tific writers.      So  universal  and   unani-  Scientific 
mous  has  been  the  condemnation  heaped   J^^  general 
upon  this  tax  that  we  must  consider  in   property  tax. 
detail  some  of  the  objections  that  have  been  raised. 

Professor  Seligman  sums  up  his  interesting  discus- 
sion of  this  tax  in  words  to  the  following  general 
import  : 

The  general  property  tax  is  a  failure  as  the  main 


294  INTRODUCTION   TO  PUBLIC  FINANCE    part    ii 

source  of  revenue  from  the  triple  standpoint  of  his- 
tory, theory,  and  practice. 

1.  Historically,  it  was  once  well-nigh  universal. 
In  a  community  mainly  agricultural  it  was  not  alto- 
gether unsuited  to  the  conditions.  But  as  soon  as 
industry  and  commerce  became  important,  it  failed 
to  extend  so  as  to  comply  with  the  requirements  of 
justice.  It  became,  in  fact,  even  where  not  so  con- 
sidered, a  tax  on  real  property.  Everywhere  but  in 
America  it  has  been  (a)  divided  into  a  number  of 
subordinate  property  taxes,  (5)  allowed  to  become  a 
subordinate  member  of  another  system,  or  (c)  en- 
tirely abandoned.  Sooner  or  later  it  will  have  to  be 
abandoned  in  America. 

2.  Theoretically  the  general  property  tax  is  defi- 
cient in  two  respects.  First,  it  assumes  that  there  is 
an  ascertainable  general  property.  But  since  prop- 
erty is  a  composite  of  inseparable  but  widely  differ- 
entiated elements,  this  assumption  is  contrary  to  the 
fact.  "The  general  mass  of  property  has  disap- 
peared, and  with  it  vanishes  the  foundation  of  the 
general  property  tax."  Secondly,  "property  is  no 
longer  a  criterion  of  faculty  or  of  tax-paying  ability." 
Two  equal  masses  of  property  ma}^  be  unequally  pro- 
ductive, because  used  by  men  of  differing  talents, 
and  thus  differently  joined  with  the  personal  element, 
or  because  the  possession  of  them  may  give  rise  to 
fortuitous  gains,  or  because  the  owner  of  one  mass  of 
property  may  be  labouring  under  peculiar  economic 
disadvantages. 


CHAP.  VIII  PROPERTY  TAXES  295 

It  is  the  income  which  property  yields  that  is  the 
best  index  of  the  tax-paying  power  which  the  prop- 
erty represents. 

3.  Practically,  "  the  general  property  tax  as  actually 
administered  to-day  is  heyond  all  peradventure  the 
ivorst  tax  known  in  the  civilised  world.''  As  at  pres- 
ent administered,  it  fails  entirely  to  reach  intangible 
property.  It  debases  public  morals  by  putting  a 
premium  on  dishonesty.  It  is  regressive  and  presses 
hardest  upon  those  relatively  least  able  to  pay.^ 

This  is  strong  language, — even  stronger  has  been 
used. 

Part  2.     Special  Property  Taxes 

Sec.  10.  The  land  tax  is  one  of  the  oldest  contri- 
butions. It  has  three  forms :  (1)  it  may  be  based 
upon  each  unit  of  area,  sometimes  with  Formso/the 
an  attempt  to  classify  the  different  units  if^^d  tax. 
as  to  fertility;  (2)  it  may  be  based  upon  the  esti- 
mated value  of  the  land  or  upon  an  estimated  average 
annual  yield  or  surplus ;  (3)  it  may  be  based  upon 
the  actual  yearly  yield,  and  be  as  it  were  a  share  in 
the  product.  The  tax  was  common  in  the  latter 
part  of  the  middle  ages  as  a  recognition  of  the  mon- 
arch's right  of  proprietorship  in  the  soil.  A  good 
example  of  this,  among  many  others,  is  afforded  by 
the  so-called  quit-rents  in  the  American  colonies. ^ 
In  their  first  form  these  payments  are  not  strictly 

1  Seligman,  Essays,  pp.  23-61 

2  See  Ripley  and  Wood. 


296  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

taxes.  They  are  acknowledgments  of  the  people's 
tenure.  But  they  frequently  grow  into  taxes.  In 
France,  as  we  have  seen,  the  taille  developed  from  feu- 
dal dues.  The  im^dt  fonder  now  yields  200,000,000 
francs.  In  England  the  old  land  tax  has  been  con- 
verted into  a  redeemable  rent  charge,  but  the  reve- 
nue from  land  is  still  taxed  in  the  general  income  tax 
and  yields  ^1,500,000  annually.  Local  taxation  in 
most  countries  falls  largely  on  land.  In  Prussia  the 
land  tax  was  in  1895  transferred  entirely  to  the  local 
bodies. 

Economic  rent  as  the  surplus  of  revenues  from 
land,  after  all  expenses  have  been  deducted,  has 
always  been  regarded  as  a  legitimate  object  of  taxa- 
tion. It  has  been  strongly  argued  that  this  tax  can- 
not be  shifted.  But  as  the  land  tax  is  not  always 
confined  to  rent-bearing  land,  being  generally  im- 
posed upon  all  land,  even  the  poorest  in  cultivation, 
and  as  modern  economic  theory  does  not  regard  rent 
as  an  inevitable  surplus,  this  old  argument  needs 
thorough  revision.     (See  Chap.  X.) 

It  is  in  the  assessment  of  this  tax  that  the  cadastre 

has  been  most  widely  used.      The  principles  upon 

which  the  best  cadastres  have  been  built 

Assessment. 

are  the  following:  (1)  A  careful  meas- 
urement of  the  land  is  made  and  recorded.  In  the 
older  ones  the  land  is  entered  in  rough  historical 
units:  the  "yoke,"  the  "hide,"  the  "seed."  Some- 
times the  cadastre  is  intended  to  serve  other  purposes, 
as  that  of  a  record  of  titles.     In  any  case  the  names 


^ 


CHAP.  VIII  PROPERTY   TAXES  297 

of  the  owners  or  occupiers  are  entered  with  each 
piece.  (2)  A  record  is  made  of  the  yield  of  each 
unit  of  area,  and  from  that  is  estimated  either  the 
gross  revenue  or  the  net  revenue,  —  more  frequently 
the  latter.  As  a  rule  tlie  cadastral  revenue  is  less 
than  the  actual  net  revenue.  Another  method  is 
that  of  recording  the  market  value. 

The  cadastre^  when  finished,  is  subject  to  more  or 
less  frequent  revision.  A  partial  revision  which  in- 
volves the  recording  of  changes  of  title,  etc.,  is  gen- 
erally made  currently.  An  entire  revision  is  only 
undertaken  after  periods  of  considerable  length. 
The  making  of  a  complete  cadastre  is  a  matter  of 
considerable  expense  and  takes  no  little  time.  In 
many  cases  more  than  the  mere  land  is  recorded, 
buildings  and  other  improvements  being  frequently 
entered  in  the  same  cadastre. 

It  is  generally  urged  in  justification  of  the  reten- 
tion of  the  land  tax,  even  in  countries  where  there 
are  other  taxes  that  fall  upon  the  revenue  Justification 
from  land,  that  the  income  accruing  from  ^^t^Ilfde^p 
land  is  constantly  increasing  in  every  other  taxes. 
growing  community,  and  that  the  expenditure  of  the 
government  accrues  largely  to  the  benefit  of  the  land- 
holders, and  appears  in  the  form  of  an  increased 
value  or  rental.  The  same  reasons  are  urged  in 
support  of  a  higher  rate  for  the  land  tax. 

On  the  basis  of  a  cadastre  the  land  tax  is  generally 
apportioned  ;  less  frequently  it  is  proportioned.  In 
general,  the  tax  lends  itself  better  than  most  others 


298  INTRODUCTION   TO  PUBIIC  FINANCE    part  u 

to  the  apportionment  method.  With  a  fixed  valua- 
tion as  a  basis  which  varies  comparatively  little  from 
year  to  year,  it  seems  perfectly  natural  and  easiest 
to  apportion  the  amount  that  it  is  desired  to  raise, 
among  the  different  pieces  or  units. 

Sec.  11.  The  older  forms  of  the  land  tax  often 
included  the  building  tax,  with  which  it  was  closely 
The  building  connected  in  character.  At  present,  this 
tax  originally    contribution  generally  forms  an  indepen- 

part  of  the  o  j  jr 

land  tax.  dcut  tax  ou  the  revenue  from  the  site 

and  the  building.  It  is,  like  the  land  tax,  a  tax  on 
a  fixed  source  of  income.  Its  incidence  will  receive 
special  attention  elsewhere. 

The  buildings  taxed  may  be  classified  according  to 
value,  or  according  to  the  uses  to  which  they  are  put. 
Farms  of  the  or  according  to  their  location,  whether 
building  tax.  ^^h'dn  ov  rural.  There  are  two  very  dif- 
ferent forms  of  the  building  tax  :  one  is  intended  to 
fall  on  the  income  derived  by  the  owner  from  the 
building;  the  other  simply  taxes  the  occupier  ac- 
cording to  the  rent,  taken  as  the  index  of  a  certain 
amount  of  tax  faculty  on  his  part.  The  second  is 
very  much  like  a  consumption  tax.'  The  first  re- 
gards the  revenue  derived  as  a  source  from  which 
the  tax  may  be  paid.  But  even  this  first  form, 
when  paid  by  an  owner  who  is  also  an  occupier,  is 
very  much  like  a  consumption  tax. 

The  building  tax,  wherever  in  use,  is  one  of  a 
number  of  other  similar  taxes ;  it  never  stands 
alone.     In  ease  of  assessment   it  has  many  advan- 


CHAP.  VIII  PROPERTY   TAXES  299 

tages.  The  valuation  is  simple  and  inexpensive. 
Alterations  affecting  the  base  can  be  easily  and  accu- 
rately ascertained.  Unlike  the  land  tax, 
the  building  tax  is  regularly  assessed  each  ^''^'^^'^' 
year.  Hence  this  tax  is  more  often  proportioned 
than  apportioned.  The  building  tax  may  be  ex- 
tended into  a  sort  of  industry  tax,  as  when  it  is 
assessed  with  higher  rates  upon  buildings  used  for 
industrial  or  commercial  purposes.  An  example  of 
this  method  of  assessing  the  business  tax  is  that  of 
France  cited  above. 

Sec.  12.  The  taxes  we  have  already  considered 
cover  most  fixed  capital.  Circulating  capital  also, 
in  all  of  its  many  forms,  has  been  sub-  Taxation  of 
jected  to  separate  taxes.  This  is  as  true  ^«p*^^- 
of  those  countries  which  have  the  general  property 
tax  as  of  those  which  attempt  to  accomplish  the 
desired  results  by  the  taxation  of  the  various  ele- 
ments of  revenue.  How  to  reach  this  kind  of  reve- 
nue and  to  make  the  faculty  which  it  represents 
bear  its  share  of  the  public  burden  is  one  of  the 
most  difficult  practical  problems  of  taxation.  The 
chief  difficulties  arise  from  the  elusive  nature  of 
circulating  capital  and  the  intimate  way  in  which 
it  is  connected  with  many  of  the  processes  of  indus- 
trial life.  Justice  and  equality  demand  its  taxation. 
But  various  pleas  of  expediency  are  against  it. 
Capital  is  hard  to  reach,  and  if  it  is  not  fairly 
taxed,  the  result  may  be  injurious  to  trade.  There 
are  two  forms  in  which  this  tax  has   been  applied 


300  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

with  some  effectiveness.  One  is  that  of  a  tax  on 
mortgages,  the  other  that  of  a  tax  or  taxes  on 
corporations  and  banks.  Some  results  have  also 
been  attained  by  the  attempt  to  tax  stocks  and 
Taxation  of  bonds.  Public  stocks  are  especially  easy 
puUic  bonds.  Qf  assessment.  But  there  is  an  objec- 
tion to  taxing  them  when  the  other  forms  of  invest- 
ment escape,  because  of  the  bad  effect  on  public 
credit.  If  it  is  distinctly  declared  beforehand  that 
the  bonds  are  to  be  taxed,  their  selling  price  is 
lowered.  If  it  is  not  so  declared,  at  the  time  of 
issue,  and  the  tax  is  subsequently  assessed,  the 
process  is  regarded  by  the  holders  as  equivalent 
to  a  partial  repudiation  of  the  debt,  and  subsequent 
loans  are  looked  upon  askance.  When,  however, 
all  forms  of  revenue-yielding  capital  are,  nominally 
at  least,  subject  to  taxation,  this  objection  to  taxing 
public  securities  disappears.  If  the  tax  is  not  to 
have  the  effect  of  reducing  the  capital  value  of  the 
stock,  bond,  or  other  security,  it  must  fall  upon 
every  form  of  capital.  But  so  great  are  the  diffi- 
culties of  making  it  thus  universal  that,  as  a  general 
rule,  such  a  tax  affects  the  rate  of  interest  on  all  new 
investments  in  the  taxed  form.  This  question  will 
receive  further  attention  under  the  head  of  Incidence. 
Where  there  is  a  complete  system  of  public  rec- 
ords for  deeds,  mortgages,  and  contracts,  necessary 
Taxation  of  to  their  validity,  it  is  comparatively  easy 
mortgages.  ^q  ^g^^  thcsc  recorded  securities.  Thus 
it  is  that  mortgages   are   generally   easily   taxable. 


CHAP.  VIII  PROPERTY   TAXES  301 

This,  however,  results  in  inequality  if  the  tax  is 
not  extended  beyond  the  recorded  contracts.  When 
the  mortgage  is  upon  property  already  taxed,  as, 
for  example,  by  the  building  tax  or  a  general  prop- 
erty tax,  the  question  arises  whether  both  the  bor- 
rower and  the  lender  should  be  taxed,  or  only  one, 
and  if  so,  which  one.  An  able  writer  says  on  this 
point,  "  Tax  the  mortgagee  on  the  amount  of  the 
mortgage,  and  the  mortgagor  on  the  value  of  the 
property  minus  the  mortgage.  That  is  the  only 
rational  system."  ^  Indeed,  it  would  be,  if  every 
other  form  of  capital  were  taxed ;  but  when  that  is 
not  the  case,  the  result  is  in  every  respect  the  same 
as  though  the  owner  were  taxed  alone.  Generally 
he  pays  more. 

Taxation  at  the  source  has   been  warmly  recom- 
mended for  reaching  interest  on  capital;  i.e.  to  have 
the  debtor  advance  the  tax  and  shift  it  stoppage  at 
if  he  can  to  the  lender  or  share  it  ^^it\l  the  source. 
him.     In  the  case  of  corporations,  this  method  is  ap- 
plied to  the  dividends.     As  Bastable  "  lias  well  shown 
such  a  tax  is   a  combined  tax  on  interest  and  on 
profits,  and  is  therefore  partly  outside  our  present 
purpose.     The  taxation  of  corporations  Taxation  of 
is  not  always  the  taxation   of   circulat-  corporations. 
ing  capital   merely.     Corporations  often  own  other 
taxable  property,  —  land,  buildings,  etc.     But  in  the 
United  States,  one  of  the  main  objects  of  the  intro- 

1  Political  Science  Quarterly,  V. ,  36, 
3  p.  422. 


302  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

duction  of  taxes  on  corporations  was  to  reach  forms 
of  personal  property  that  generally  escaped.  The 
other  object  was,  of  course,  to  extend  the  general 
property  tax  to  cover  all  property.  We  find  that 
the  basis  of  the  corporation  tax  is,  in  many  instances, 
the  capital  stock  at  its  par  value,  or  at  its  market 
value ;  and  in  a  good  many  instances,  the  bonded 
indebtedness  is  also  included.  When  the  nature 
of  the  business  is  such  that  the  capital  stock  and 
bonds  do  not  represent  all  the  capital  concentrated 
in  the  hands  of  the  corporation,  as,  for  example,  in 
the  case  of  banks  and  insurance  companies,  then  the 
business  transacted,  the  gross  earnings,  the  divi- 
dends, or  the  net  earnings  become  the  basis.  But 
no  clear  line  is  drawn  between  the  taxation  of  in- 
terest and  profits,  so  that  corporation  taxes  often 
approach,  in  character  and  operation,  business  taxes.^ 
Sec.  13.  There  remains  but  one  other  very  im- 
portant property  tax,  and  that  is  the  inheritance  tax, 
Oriqinofthe  ^^  ^^®  succcssion  tax,  somctimcs  called 
inheritance  dfcf^^h  duties.'^^  The  feudal  "  relief  "  and 
"  heriot  "  were  payments  made  from  the 
estate  of  a  dead  vassal,  or  by  his  heirs,  in  recog- 
nition of  the  lord's  authority.  Similar  payments 
were  made  upon  the  transfer  of  property.     But  the 

1  The  best  discussion  of  tliis  interesting  field  of  taxation  is  con- 
tained in  Chaps.  VI.,  VII.,  and  VIII.,  of  Seligman's  Essays  on 
Taxation. 

2  See  Max  West,  "  The  Inheritance  Tax,"  Columbia  College 
Studies,  IV.,  2;  also  the  excellent  chapters  in  Bastable,  2d  ed., 
and  Seligman,  Essays,  p.  307  ff. 


CHAP.  VIII  PROPERTY   TAXES  303 

direct  connection  between  these  feudal  dues  and  the 
modern  inheritance  taxes  is  hard  to  trace.  It  is 
probable  that  the  older  dues  suggested  the  feasibil- 
ity of  the  modern  inheritance  tax.  But  no  closer 
connection  than  that  has  been  established.  The 
modern  inheritance  tax  is  a  special  exercise  of  the 
taxing  power.  It  is  resorted  to  on  account  of  the 
comparative  ease  with  which  large  returns  can  be 
obtained  at  relatively  little  expense  and  without 
great  friction.  It  is  generally  justified  in  one  of 
two  ways:  (1)  It  is  claimed  that  the  j^gf^fycation 
deceased  person  has  probably  not  paid  of  the  inheri- 
his  share  of  the  general  taxes  during  his  '""''^  ^"^" 
lifetime,  and  that  the  publicity  necessarily  connected 
with  the  transfer  of  his  property  to  his  heir  affords 
an  excellent  opportunity  for  the  fiscus  to  "  get  even  " 
with  him.  If  this  were  the  sole  justification,  it 
would  require  that  the  exact  history  of  every  estate 
should  be  investigated,  and  only  those  subjected  to 
the  tax  that  could  be  shown  to  have  escaped  taxa- 
tion. But  this  would  be  a  laborious  and  costly 
process.  Another  justification  is,  therefore,  sought. 
(2)  It  is  claimed  that  in  all  cases  of  collateral  in- 
heritaroe,  the  newly  acquired  wealth  comes  to  the 
heir  as  a  fortuitous,  more  or  less  unexpected  gain. 
He  had  been  living  without  it,  and  this  sudden 
increment  of  wealth  represents,  temporarily  at  least, 
a  sudden  increase  in  his  ability  to  pay  taxes.  This 
justification  points  to  the  necessity  of  exempting 
the  inheritance  by  immediate  dependents  of  the  de- 


304 


INTRODUCTION   TO  PUBLIC  FINANCE     fart  u 


ceased.  They  were  already  living  upon  that  prop- 
erty ;  and  the  death  and  breaking  up  of  the  family 
and  of  the  estate  represent  to  them  not  an  increased, 
but  a  decreased,  tax  faculty. 

An  examination  of  the  many  forms  of  inheritance 
taxes  reveals  two  main  tendencies.  The  first  is  to 
^    ,     .      ^    exempt  small  estates  and  to  establish  a 

Tendencies  of  ^ 

modern  inheri-  progressive  rate  for  larger  ones.  The 
tance  taxes.  gecond  is  to  exempt  that  portion  of  the 
estate  passing  to  the  immediate  heirs.  The  grounds 
for  this  second  exemption  have  already  been  exam- 
ined. The  grounds  for  the  first  are  wrapped  up  in 
the  general  principles  of  a  proportional  or  progres- 
sive rate.  A  very  good  example  of  these  principles 
is  afforded  by  the  new  English  death  duties  of  1894, 
and  the  older  "  Legacy  and  Succession  Duties  "  of 
1881,  which,  however,  are  not  progressive  as  to 
amount  of  property.  Under  the  new  law,  the  estate 
of  every  person  dying  after  the  1st  of  August,  1894, 
must  pay  a  duty  which  varies  according  to  the  fol- 
lowing schedule  as  amended  in  1907 : 


Estates  from 

£100  to 

£500  pay 

£1 

0.9 

per  hundred. 

Estates  from 

500  to 

1,000  pay 

2 

0 

per  hundred. 

Estates  from 

1,000  to 

10,000  pay 

3 

0 

per  hundred. 

Estates  from 

10,000  to 

25,000  pay 

4 

0 

per  hundred. 

Estates  from 

25,000  to 

50,000  pay 

4 

10 

per  hundred. 

Estates  from 

50,000  to 

75,000  pay 

5 

0 

per  hundred. 

Estates  from 

75,000  to 

100,000  pay 

5 

10 

per  hundred. 

Estates  from 

100,000  to 

150,000  pay 

6 

0 

per  hundred. 

Estates  from 

150,000  to 

250,000  pay 

7 

0 

per  hundred. 

Estates  from 

250,000  to 

500,000  pay 

8 

0 

per  hundred. 

Estates  from 

500,000  to 

750,000  pay 

9 

0 

per  hundred, 

CHAP.  VIII  PROPERTY   TAXES  305 

Estates  from  £750,000  to  £1,000,000  pay  £10     O5.  per  hundred. 
Estates  from  £1,000,000  to  £1,500,000  pay  £10    0    per  hundred 

on  £1,000,000,  and  £11  on  the  reniamder. 
Estates  from  £1,500,000  to  £2,000,000  pay  £10    0  per  hundred 

on  £1,000,000  and  £12  on  the  remainder. 
Estates  from  £2,000,000  to  £2,500,000  pay  £10    0  per  hundred 

on  £1,000,000  and  £13  on  the  remainder. 
Estates  from  £2,500,000  to  £3,000,000  pay  £10    0  per  hundred 

on  £1,000,000  and  £14  on  the  remainder. 
Estates  from  £3,000,000   and   over  pay   £10    0  per  hundred 

on  £1,000,000  and  £15  on  the  remainder. 

The  older  legacy  and  succession  duties  are  also  pro- 
gressive, but  in  a  different  way,  rising  as  the  degree 
of  relationship  of  the  recipient  of  the  legacy  becomes 
more  and  more  remote  from  the  deceased,  from  <£1 
10s.  in  a  hundred  to  .£11  10s.  in  a  hundred.  Thus 
the  total  burden  that  may  fall  upon  the  share  of  any 
one  person,  that  is,  of  a  stranger  to  the  blood  receiv- 
ing £3,000,000  or  over,  is  24.8  per  cent. 

In  the  United  States  the  inheritance  tax  is  growing 
rapidly  in  importance.  This  growth  dates  from  1885, 
but  assumed  greater  dimensions  after  Growth  of  the 
1900.  As  early  as  1826  Pennsylvania  tax  in  the 
adopted  an  inheritance  tax,  and  a  few  United  states. 
other  states  followed  her  example.  The  federal  gov- 
ernment enacted  such  a  tax  in  1862  to  meet  the  exi- 
gencies of  war.  But  this  tax  was  discontinued  after 
the  war,  when  the  need  for  extra  revenues  ceased. 
But  prior  to  1885  the  tax  was  of  no  importance,  either 
from  point  of  view  of  yield  or  influence.  In  the  first 
edition  of  this  book  it  was  stated  that  at  that  time 
(1896)   thirteen   states   were  using   the  inheritance 


306  INTRODUCTION  TO  PUBLIC  FINANCE    part  il 

tax.  At  the  present  time  (1909)  only  sixteen  of 
the  fifty-one  states  and  territories  do  not  impose  this 
tax. 

While  the  use  of  this  tax  has  been  spreading  from 
state  to  state,  those  having  first  adopted  it  have  been 
busy  intensifying  it.  At  first  it  applied  only  to  col- 
hiteral  heirs ;  since  then  it  has  been  applied  also  to 
direct  heirs.  The  rates,  at  first  low,  have  been  raised. 
The  feature  of  progression,  at  first  introduced  with  a 
trembling  hand,  has  been  more  freely  and  boldly  used. 
These  taxes  are  now  levied  on  all  property  passing 
by  will,  or  by  the  intestate  laws,  or  by  transfer  in- 
Propertysub-  tended  to  take  effect  after  death.  But 
ject  to  this  tax.  ^^  xi;jost  states  property  passing  to  institu- 
tions of  learning,  to  churches,  or  in  short  into  hands 
where  it  would  be  exempt  from  the  general  property 
tax,  is  exempt  from  the  inheritance  tax.  The  widow 
and  children  usually  enjoy  large  exemptions.  The 
rates  are  usually  graduated  and  are  progressive  in 
one  or  in  two  ways.  They  are  almost  always  pro- 
gressive as  the  relationship  of  the  beneficiary  to  the 
deceased  becomes  remote.  They  are  frequently  pro- 
gressive as  the  bequest  (or  as  the  estate)  increases  in 
amount.  Although  the  states  have  copied  freely  from 
one  another,  there  is  as  yet  little  uniformity,  and  it  is 
not  possible,  so  frequent  are  the  changes,  to  distinguish 
a  type.  The  most  elaborate  laws  are  those  of  Wiscon- 
sin and  California,  and  these  may  possibly  prove  to  be 
the  type  toward  which  the  states  are  working.  That 
of    California   will  serve  as   an   illustration.      The 


CHAP.   VIII 


PROPERTY   TAXES 


307 


following  table  shows  the  principal  features  of  that 
law  : 


Classification 

OR  Indication  of 

Relationship 

Property 
Exemption 

Application  of  Rates  to  Value  of 
Inheritance  or  Bequests 

On  Excess 
after  De- 
ductiofl  of 
Exemption 
from  $25,000 

$25,000 

to 
$50,000 

$50,000 

to 
$100,000 

$100,000 

to 
$500,000 

In  Ex- 
cess of 
$500,000 

Husband, wife,  lineal 
issue,  lineal  ances- 
tor,   adopted     or 
mutually  acknowl- 
edged child.     .    . 

Brother,    sister,    or 
descendant  of 
either,     wife      or 
widow  of  a   son, 
husband    of   a 
daughter     .    .    . 

Uncle,  aunt,  or  de- 
scendant of  either 

Grand  uncle,  grand 
aunt,  or  descend- 
ant of  either   .     . 

Other  degree  of 
collateral   consan- 
guinity,   stranger 
in  blood,  body  pol- 
itic,  or  corporate 

\  Widow  or 
minor 

1      child, 

f     $10,000. 
Others, 

J      $4,000 

■     $2,000 

1,500 
j        1,000 

500 

•       1% 

li% 

3% 
4% 

5% 

6% 

2% 

3% 

6% 
8% 

10% 

2i% 

83% 

10% 
12i% 

8% 

4i% 

9% 
12% 

15% 

A  few  examples  will  show  how  this  law  is  expected 
to  work.  Thus,  for  example,  a  widow  inheriting 
$25,000  from  her  husband  would  pay  1  per  cent  on 
815,000,  or  $150.  If  she  inherited  only  $10,000,  she 
would  be  entirely  exempt.  If  she  inherited  $500,000, 
she  would  pay  3  per  cent  on  $490,000,  or  $14,700. 
A  stranger  in  the  blood  inheriting  $25,000  would  pay 
5  per  cent  on  $24,500,  or  $1225;  and  inheriting $500,000 
would  pay  nearly  $75,000.  This  tax  is  paid  by  the  ex- 
ecutor or  administrator  direct  to  the  county  treasurer 
under  the  jurisdiction  of  the  superior  court  of  the 


308  INTRODUCTION   TO  PUB  11 C  FINANCE    part  ii 

county  in  which  probate  proceedings  are  being  taken. 
The  county  treasurers  fire  allowed  rather  liberal  fees 
for  the  collection  of  this  tax  in  addition  to  their  salary, 
or  other  compensation  allowed  by  law. 

The  most  radical  inheritance  tax  ever  enacted  by 
any  of  the  states  is  the  one  in  the  new  State  of  Okla- 
homa. The  rates  are  progressive  in  both  ways,  and 
for  strangers  to  the  blood  confiscate  all  but  $100  of 
the  entire  bequest  if  it  reaches  $94,500. 

An  examination  of  the  statutes  and  of  the  discus- 
sions of  this  tax  shows  that  the  arguments  in  justifica- 
tion of  it  which  have  appealed  most  strongly  to  the 
American  lawmakers  are  two  in  number:  (1)  "That 
the  state  has  a  right  to  curtail  the  right  of  bequest"; 
(2)  "  That  it  is  desirable  to  curb  the  perpetuation  of 
large  fortunes."  It  was  a  sort  of  grim  humour  which 
led  the  Louisiana  lawmakers  to  enact  that  if  the  heir 
could  prove  that  the  property  he  received  had  paid 
its  full  quota  of  taxes  during  the  last  five  years  of 
the  life  of  the  deceased,  there  would  be  no  inheri- 
tance tax  levied  on  it.  But  doubtless  the  "  getting 
even  after  death"  argument  has  had  its  influence 
elsewhere.  The  fact  that  here  was  a  source  of 
revenue,  easily  collected,  which  could  be  availed  of 
to  meet  the  growing  expenses  of  the  state  govern- 
ments without  increasing  the  apparent  tax  burden, 
as  revealed  in  the  state  tax  rate  on  property,  has, 
however,  been  the  most  potent  of  all  the  forces  lead- 
ing to  the  extension  of  this  tax.  It  affords  a  revenue 
which,  like  that  from  indirect  taxes,  flows  into  the 


CHAP.  VIII  PROPERTY  TAXES  309 

treasury  unseen  by  the  legislator's  tax-paying  con- 
stituents other  than  the  heirs  affected. 

The  yield  of  this  tax  is  coming  to  be  large.  In 
1894  two  states  collected  1663,000  from  this  source; 
in  1892  six  states  collected  13,107,000;  The  yield  of 
in  1902,  twenty-eight  states  obtained  <^*«<«^- 
'$7,138,000;  and  in  1905,  thirty  states  raised  over 
$10,600,000  by  this  means.  The  yield  is,  of  course, 
irregular,  varying  from  year  to  year  by  large  amounts, 
so  that  it  is  not  a  suitable  source  of  revenue  for 
meeting  regularly  recurrent  demands. 

Most  governments  regard  the  inheritance  tax  as 
current  revenue  and  do  not  attempt  to  treat  its  yield 
as  a  permanent  endowment  fund  for  any  yr^^ 
specific  purpose.  Inasmuch  as  the  tax  to  which  the 
is  so  clearly  drawn  from  the  accumulated  g^^wM  feT^  "^ 
capital  and  not  from  the  current  income  applied. 
of  the  people,  this  appears  to  be  an  improvident  use 
of  the  proceeds.  While  it  might  not  be  a  wise 
policy  to  attempt  to  invest  the  entire  proceeds  and 
to  spend  only  the  interest  thereon,  yet  it  would  seem 
wise  to  use  this  income  solely  for  buildings  or  improve- 
ments of  an  enduring  character.  As,  however,  most 
governments  do  put  into  permanent  improvements 
sums  equal  to  or  in  excess  of  the  yield  of  the  inherit- 
ance tax,  the  failure  to  set  it  aside  specifically  for  such 
purposes  is  not,  perhaps,  of  immediate  importance.^ 

1  It  seems  strange  that  the  state  universities  in  the  United  States 
have  not  demanded  that  the  proceeds  of  the  inheritance  tax  should 
be  turned  into  their  endowment  funds.  Such  a  use  would  be  emi- 
nently fitting  and  would  lessen  the  opposition  to  the  tax. 


BIO         INTRODUCTION  TO  PUBLIC  FINANCE     part  it 

Of  recent  years  there  lias  been  much  discussion  of 

the  advisability  of  a  federal  inheritance  tax  in  the 

The  proposal     United    States.    The  "legacy  tax"  en- 

to  enact  a  per-  acted  in  1862  as  a  war  measure  was  re- 
manent/ed-  1111 
erai  inheri-       pcalcQ  wlicu  the  need  lor  heavy  taxation 

tance  tax.  ccascd  after  the  close  of  the  war.  Such 
a  tax  is  now  urged  as  a  means  of  reducing  swollen 
fortunes,  or  as  a  substitute  for  the  tariff.  But  be- 
hind the  arguments  advanced  lies  the  desire  to  cur- 
tail the  powers  and  importance  of  the  states,  and  to 
correspondingly  enhance  the  power  of  the  federal 
government.  It  is  a  movement  supported  only  by 
extreme  federalists.  The  whole  discussion  seems  to 
present  a  modern  phase  of  the  old  "  States'  rights  " 
problem.  It  is  easy  to  show  that  the  states  can  at- 
tend, just  as  effectively  as  can  the  federal  government, 
to  the  punishment  of  men  who  acquire  "  tainted  for- 
tunes," if  such  a  use  of  the  inheritance  tax  is  not  a  mis- 
use, which  it  is  in  the  opinion  of  many  economists.^ 
It  is  also  easy  to  show  that  the  federal  government 
should  continue  to  depend  on  indirect  taxes,  or  that 
it  is  unwise  to  interfere  with  the  states  in  working 
out  a  great  experiment,  but  to  do  so  would  be  beside 
the  point.  Until  the  states  are  forced  to  abandon  all 
control  over  family  relations,  and  to  surrender  to  the 
federal  government  the  entire  field  of  legislation 
relating  to  property,  and  the  inheritance  thereof,  it 
will  be  illogical  and  harmful  for  the  federal  govern - 

1  See  the  address  by  Bullock,  before  the  National  Tax  Conference 
at  Columbus,  Ohio,  1907. 


1 


CHAP.  VIII  PROPERTY   TAXES  311 

ment  to  tax  inheritance.  But  that  will  not  tie  the 
hands  of  those  who  wish  to  force  an  issue  as  to  the 
relative  rights  of  the  states  and  of  the  federal  gov- 
ernment in  this  field.  The  question  is  one  of  deep 
political  import. 


CHAPTER   IX 

PERSONAL    TAXES 

Section  1.    The  simplest  form  of  personal  taxa- 
tion is  the  collection  of  an  equal  contribution  from 
each  citizen.     But  such  a  tax  cannot  be 

The  poll  tax.  . 

large,  because  if  it  were  it  would  impose 
a  burden  beyond  the  ability  of  the  poor.  A  poll  tax 
by  itself  cannot  yield  sufficient  revenue  to  support 
the  government.  The  uniform  per  capita  tax  is  not 
just  unless  all  wealth  is  equally  distributed,  and  only 
in  a  very  primitive  community  is  such  equality 
found.  Hence  it  is  that,  outside  of  the  United  States, 
the  poll  tax  now  possesses  little  more  than  an 
historic  interest.  In  the  United  States  the  poll  tax 
is  used  either  for  local  purposes  (usually  for  roads, 
or  for  schools)  or  for  state  purposes,  or  both  for 
local  and  state  purposes,  in  every  state  and  territory 
except  the  District  of  Columbia  and  Maryland.  In 
Illinois  it  is  not  used  in  all  parts  of  the  state.  It  is 
usually  levied  on  all  males  between  the  ages  of  20  or 
21  years  and  45  or  60.  In  Wyoming  women  are  also 
subject  to  this  tax.  It  is  very  laxly  and  poorly  col- 
lected in  almost  all  cases,  being  in  general  successfully 
evaded  by  many  of  those  who  have  no  other  tax  to 
pay.  In  four  cases  it  takes  the  form  of  a  fee  for  the 
registration  of  voters.  In  the  early  taxes  of  the 
commonwealths  of  the  United  States  there  was  fre- 

312 


CHAP.  IX  PERSONAL    TAXES  313 

quently  an  assessment  of  each  person  at  so  much  per 
poll  as  a  part  of  the  general  property  tax.  In  some 
commonwealths  the  poll  tax  still  exists  in  this  form. 
Originally  this  contribution  was  very  generally  used 
for  road  purposes.  In  many  commonwealths  there 
is  still  a  road  tax  of  so  much  per  capita  assessed  upon 
those  individuals  who  are  found  by  the  authorities  in 
the  road  districts.  The  road  tax  is  generally  payable 
either  in  labour  or  in  money. ^ 

The  returns  from  the  poll  tax  are  generally  insig- 
nificant. Despite  the  apparent  ease  of  assessment,  the 
poll  tax  is  expensive  to  collect.  It  frequently  causes 
much  opposition  and  friction.  It  militates  against 
the  demands  of  equality,  and  has  been  superseded 
by  other  forms  of  personal  taxation,  which  recognise 
differences  in  faculty. 

Sec.  2.  We  have  already  seen  how  the  poll  tax  in 
one  instance  developed  into  the  income  tax.  That 
tax  will  now  be  studied  more  closely.  The  theory  of 
While  it  is  true  that,  since  the  abolition  the  income 
of  the  federal  tax,  the  income  tax  has 
little  more  than  a  theoretical  interest  for  American 
readers,^  yet  inasmuch  as  the  hopes  of  many  reformers 

1  No  comprehensive  study  of  the  American  poll  tax  has  ever 
been  made,  and  no  satisfactory  account  of  it  can  be  found  in  print. 
Its  historical  interest  is  so  great  that  it  would  repay  a  careful 
investigation. 

2  Sixteen  states  have  at  various  times  used  an  income  tax,  and 
a  few  still  use  it.  But  the  revenues  obtained  are  insignificant,  and 
the  tax  is  of  little  importance  in  the  United  States.  See  Kinsman, 
The  Income  Tax  in  the  Commonwealths  of  the  United  States. 


314  INTRODUCTION   TO   PUBLIC  FINANCE    part  ii 

centre  in  it,  and  inasmuch  as  it  may  any  day,  again, 
become  a  live  question,  it  is  well  to  give  the  theory 
of  the  tax  some  consideration  here.  While  the 
general,  or  special,  property  taxes  rest  either  on 
the  benefit  theory  or  on  the  faculty  theory  of  tax- 
ation, income  taxes  are  better  defended  from  the 
standpoint  of  the  faculty  theory.  It  is  easier  to 
make  it  clear  that  income  measures  faculty  than 
it  is  to  show  how  income  can  measure  benefit.  To 
be  sure,  it  has  been  claimed  with  some  plausibility 
that  income  is  a  sure  indication  of  the  benefit  en- 
joyed under  the  government.  But  that  proposi- 
tion requires  more  argument  and  explanation  than 
does  the  simple  statement  that  a  citizen  is  able  to  pay 
more  or  less  because  he  has  a  greater  or  a  smaller 
income. 

Besides  this  advantage  of  easier  justification,  the 
income  tax  has  in  common  with  all  personal  taxes 
another  recommendation.  It  levies  directly  on  the 
taxpayer.  The  nation's  income  from  taxation  is 
derivative.  As  such  it  is  abstracted  from  the  an- 
nual increment  of  wealth  of  the  citizens.  Any  tax 
which  is  actually  paid  out  of  capital  or  property  may 
be  ruinous.  Property  taxes,  as  we  have  seen,  are, 
theoretically,  paid  from  the  revenue  earned  by  the 
property  or  out  of  other  income  of  the  owner,  the 
property  being  at  best  but  the  indication  of  faculty 
or  of  benefit.  But  the  income  tax  finds  the  indica- 
tion of  faculty  in  the  source  of  the  tax.  There  is  a 
certain  directness  about  this   identification  of   base 


CHAP.  IX  PERSONAL    TAXES  315 

and  source  which  theoretically,  at  least,  is  a  strong 
recommendation  for  this  form  of  tax. 

From  the  standpoint  of  the  faculty  theory  no  gen- 
eral property  tax,  and  no  system  of  special  property 
taxes  which  has  not,  incorporated  in  it,  a  tax  on  wages, 
salaries,  profits,  and  the  like,  can  be  called  equal. 
Many  persons  enjoying  comparatively  little  property 
live  in  luxury  and  ease  from  their  personal  gains, 
while  many  others  possessing  comparatively  large 
property  may  be  from  time  to  time  in  serious  straits. 
For  example,  to  be  "  land  poor  "  is  to  be  poor  indeed. 
Large  property  does  not  always  imply  ability  to  pay 
taxes,  and  the  absence  of  property  does  not  always 
imply  absence  of  ability. 

There  has  been  a  feeling  in  the  United  States,  not 
always  clearly  expressed,  yet  strong  enough  to  influ- 
ence legislation,  that  the  earnings  of  personal  exer- 
tion, professional  fees,  and  the  like  are  not  good 
subjects  for  taxation.  This  is  the  result  of  an  ex- 
treme laissez-faire  view,  which  decries  every  sort  of 
interference  with  indivdual  freedom.  Every  tax  is 
seen  or  felt  to  have  a  repressive  tendency,  wliich  is 
sometimes  supposed  to  be  one  of  the  main  objects 
in  assessing  taxes.^  It  is  feared,  then,  that  to  tax  the 
earnings  of  men  would  discourage  exertion,  would 
discourage  industry.     That  this  is  a  mistaken  view 

1  A  liquor  license  in  a  certain  Western  town  cost  $100.  A  tax 
of  .$100  was  put  upon  banks.  The  bankers  held  up  their  hands  in 
horror:  "The  people  think  the  banks  are  as  undesirable  as  the 
saloons  1" 


316        INTRODUCTION   TO  PUBLIC  FINANCE      part  il 

of  the  nature  of  taxation,  will,  in  the  light  of  our 
whole  discussion,  be  evident  from  the  mere  state- 
ment. A  general  tax  on  all  income  would  not  dis- 
courage income  getting,  but  might  even  act  as  a 
stimulus  thereto,  more  income  being  required  to 
meet  the  tax  and  the  same  expenses  as  before.  It 
may  be  true  that  this  form  of  income  represents  less 
faculty  than  income  from  property,  because  more 
precarious  than  the  latter,  which  furthermore  leaves 
the  owner  free  to  engage  in  the  getting  of  other  in- 
come. But  the  entire  exemption  of  personal  earnings 
cannot  be  justified. 

Sec.  3.  The  form  of  the  income  tax  will  be  deter- 
mined by  the  place  given  it  in  the  system  of  taxa- 
^^     ,       ^     tioh.     If  it  were  possible  to  administer 

The  place  of  -^  _ 

the  tax  in  the  a  single  tax  of  any  sort  in  accord  with 
system.  ^^^  demands  of  justice,  the  income  tax 

would  be,  theoretically,  the  one  to  be  chosen.  But 
the  objections  to  any  single  tax,  already  stated,  bear 
upon  this  as  well  as  upon  any  other.  Theoretically, 
it  is  best  to  make  the  income  tax  the  central  one  of 
the  system,  the  gaps  of  which  are  filled  in  by  other 
taxes.  If  this  be  the  intention,  then  the  income  tax 
can  be  arranged  in  the  form  in  which  it  is  most  easy 
to  administer.  Thus  the  very  small  incomes  can  be 
exempt  from  the  income  tax,  being  covered  by  direct 
and  indirect  consumption  taxes.  In  this  way  one 
source  of  difficulty  and  friction  is  avoided.  Then 
no  distinction  need  be  made  in  the  assessment  of 
income  from  different  sources.     For  if  it  be  decided 


CHAP.  IX  PERSONAL    TAXES  317 

to  tax  income  from  funded  investments  at  a  higher 
rate  than  other  forms  of  income,  this  additional  tax 
can  be  laid  on  in  the  form  of  a  property  tax.  How 
far  the  exemption  of  smaller  incomes  should  go,  or 
to  what  extent  funded  incomes  should  be  more 
heavily  burdened,  depends  upon  the  concrete  facts 
in  each  case.  An  abatement  of  the  burden  in  cases 
where  there  are  already  more  than  the  usual  claims 
on  the  income,  as  of  a  large  family,  is  also  some- 
times given. 

Sec.  4.  As  an  example  of  such  a  tax,  not,  per- 
haps, ideally  perfect,  but  still  laid  down  in  accord 
with  the  general  principles  enunciated  Prussian  in- 
above,  we  will  study  somewhat  in  detail  '^^^^t"^- 
the  Prussian  income  tax.^  In  order  to  have  in  mind 
the  main  features  of  the  development  already  out- 
lined above.  Chap.  V.,  we  quote  from  Mr.  Hill  the 
successive  stages  in  the  growth  of  personal  taxation 
in  Prussia: 

"  1.    A  uniform  poll  tax,  1811. 

"  2.  A  class  tax,  collecting  somewhat  more  from 
the  prosperous,  and  not  less  from  the  poor,  1820- 
1821. 

"  3.  To  supplement  the  class  tax,  an  income  tax 
with  comparatively  few  classes,  a  uniform  rate,  and 
a  maximum  limit,  1851. 

1  For  history  see  Hill,  Quarterly  Journal  of  Economics,  VI., 
207;  Wagner,  "Die  Reform  der  directen  Staatsbesteuerung  in 
Preussen  im  Jahre  1891,"  Schanz'  Finanz  Archiv.,  VIII  Jahr- 
gang,  II.  Band.     A  full  statement  of  the  law  is  there  appended. 


318 


INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 


"4.  Classification  made  finer,  the  maximum  limit 
removed,  and  the  class  tax  below  made  practically 
an  income  tax  with  a  progressive  rate,  and  the 
exemption  of  incomes  up  to  420  M.,   1873. 

"5.  Exemption  of  incomes  up  to  900  M.,  reduc- 
tion of  the  remaining  rates  of  the  class  tax,  and  of 
the  two  lowest  rates  of  the  income  tax,  1881-1883. 

"6.  Principle  of  progression  extended  to  all  in- 
comes under  100,000  M.,  incomes  under  10,000  M. 
taxed  less  than  before,  and'  higher  incomes  more ; 
a  declaration  of  income  by  the  taxpayer  required, 
and  a  finer  classification   adopted,  1891." 

To  make  the  new  tax  still  more  clear,  we  quote 
the  rates  from  the  law  itself: 


Tariff  of  Rates 


Incomes 

Rate 

Incomes 

Rate 

From 
M. 

To  (inclusive) 
M. 

M. 

From 
M. 

To  (inclusive) 

M. 

900 

1,050 

6 

3,900 

4,200 

92 

1,050 

1,200 

9 

4,200 

4,500 

104 

1,200 

1,350 

12 

4,500 

5,000 

118 

1,350 

1,500 

16 

5,000 

5,500 

132 

1,500 

1,650 

21 

5,500 

6,000 

146 

1,650 

1,800 

26 

6,000 

6,500 

160 

1,800 

2,100 

31 

6,500 

7,000 

176 

2,100 

2,400 

36 

7,000 

7,500 

192 

2,400 

2,700 

44 

7,500 

8,000 

212 

2,700 

3,000 

52 

8,000 

8,500     . 

232 

3,000 

3,300 

60 

8,500 

9,000 

252 

3,300 

3,600 

70 

9,000 

9,500 

276 

3,600 

3,900 

80 

9,500 

10,500 

300 

CHAP.  IX  PERSONAL    TAXES 

The  rate  increases 


319 


From 
M. 

To 
M. 

In  Stages  op 
M. 

By 
M. 

10,500 
30,500 
32,000 
78,000 

30,500 

32,000 

78,000 

100,000 

1,000 
1,500 
2,000 
2,000 

30 

60 

80 

100 

In  the  case  of  incomes  from  100,000  M.  to  105,000 
M.  the  tax  is  4000  M.  And  from  that  point  on  the 
proportional  rate  of  4  per  cent  is  assessed  upon  the 
lower  limits  of  stages  of  5000  M.  each. 

This  rate  is  progressive  from  about  two-thirds  of 
1  per  cent  at  900  M.  to  3  per  cent  at  10,000  M. 
Then  the  rate  is  nearly  proportional  at  3  per  cent 
up  to  30,000  M.  Then  progressive  again,  until 
at  100,000  M.  4  per  cent  is  reached,  after  which  it 
is  proportional  again.  Each  taxpayer  having  an 
income  of  over  3000  M.  is  required  to  "declare"  it. 
He  has  to  fill  out  a  blank  calling  for  a  statement 
of  income  from  each  of  four  sources:  (1)  from 
capital  invested,  interest  and  dividends ;  (2)  from 
landed   property   and    houses,   including   all    crops, 


whether  consumed  in  the  house  or  not. 


The  form  of 


but  deducting  the   cost  of   cultivation;   thededara- 
(3)  from  trade,  industry,  or  mining,,  de- 
ducting  the   cost   of   maintenance ;     (4)   from   any 
employment,    wages,   salaries,    fees,    and    including 
pensions  and  every  source  of  income  not  covered  by 


320        INTRODUCTION  TO  PUBLIC  FINANCE      part  n 

(1)  (2)  and  (3).  Deductions  are  allowed  (1)  for 
interest  on  debts,   except  that  on    business    debts ; 

(2)  for  permanent  legal  burdens  (example,  mainte- 
nance of  reserves) ;  (3)  contributions  to  sick  funds ; 
(4)  life-insurance  premiums.  This  division  of  the 
income  into  different  parts  is  for  the  sake  of  accu- 
racy of  declaration,  not  for  the  .  sake  of  assessing 
different  rates  on  the  different  kinds  of  income. 

Persons  with  large  dependent  families  or  labour- 
ing under  any  special  economic  conditions  seriously 
Abatements  affecting  their  faculty  are  allowed  an 
allowed.  abatement  of  not  more  than  three  grades, 

provided  their  incomes  are  not  over  9500  M.  Per- 
sons having  less  than  3000  M.  deduct  50  M.  for  each 
child  under  fourteen  years  of  age,  and  if  there  are 
three  such  children,  a  reduction  of  one  grade  is 
made. 

Corporations  and  stock  companies  pay  the  income 
tax  on  all 'dividends  over  3  J  per  cent.  This  makes 
double  taxation  of  this  income,  which  is  regarded  as 
particularly  "capable."  In  other  ways  the  attempt 
is  made  to  tax  funded  income  more  heavily.  The 
exemption  of  incomes  below  900  M.  (|225)  and 
the  lower  rate  for  smaller  incomes  is  justified  on  the 
ground  that  the  consumption  taxes  already  impose  a 
burden  on  these  persons. 

The  assessment  of  the  tax  is  not  perfect.  It  is 
said  to  be  considerably  better,  however,  than  the 
assessment  of  property  in  America.  Large  incomes 
escape  in  part.     It  has,  however,  an  advantage   in 


CHAP.  IX  PERSONAL    TAXES  321 

that  the  evasion  of  the  tax  does  not  in  Prussia  as  it 
does  in  America  intensify  existing  differences  and 
inequalities.  Other  parts  of  the  system  tend  to 
offset  the  failure  in  this  case. 

Sec.  5.   The  British  income  tax,  correctly  called 
"the  property  and  income   tax,"  may  serve  as  an- 
other   illustration,   but    it    differs    very   The  property 
much  from  the  Prussian.     Logficallv,  this  "'^'^  income 

°  ''  tax  in  Eng- 

tax  might  have  been  treated  in  the  land. 
previous  chapter,  but  it  is  as  well  to  discuss  it 
here.  In  the  first  place,  as  has  already  been  stated, 
it  is  rather  a  system  of  taxes  on  revenue  than  a  tax 
on  the  aggregate  income  of  each  person.  It  is  a 
system  of  modified  property  taxes,  with  a  wage  and 
salary  tax  appended.  In  Prussia  the  intention  is 
to  make  the  total  income  the  base  irrespective  of 
the  source,  and  reference  to  the  sources  is  called 
for  in  the  declaration  merely  as  a  means  of  getting 
at  the  total  with  greater  accuracy.  In  England  the 
different  sources  are  kept  strictly  apart,  and  there  is 
a  difference  made  in  the  treatment  of  each  kind  of 
income,  the  tax  being  in  some  cases  "stopped  at 
the  source."  The  total  income  is  with  some  excep 
tions  called  into  use  only  in  estimating  the  exemp- 
tions and  abatements.  The  taxpayer  has  the  right 
by  summing  up  his  whole  income  to  show  that  he 
has  been  taxed  too  much,  or  is  entitled  to  exemp- 
tion. In  that  case  he  is  reimbursed.  In  1907-1908 
the  abatements  proper  amounted  to  .£885,670 ;  ex- 
emptions  on   account   of    small   incomes   amounted 

T 


322        INTRODUCTION   TO   PUBLIC  FINANCE     part  ii 

to  X 886,1 34.  The  total  abatements  of  all  sorts, 
.£2,798,289.  So  separate  are  the  different  parts  of 
this  tax  that  Mr.  Wilson  says  of  it :  ^  "  To  the  bulk 
of  the  people  it  is  known  in  its  most  obnoxious  (?) 
form  as  a  tax  upon  ordinary  incomes,  salaries,  profes- 
sional earning,  profits  of  trading,  etc."  Bastable 
(p.  449)  says :  "  Inequalities  are,  however,  removed 
by  the  comprehensiveness  of  the  tax." 

The  various  revenues  are  taxed  in  five  "  schedules," 
known  as  Schedules  A  to  E, 

The  following  outline  of  these  schedules  from  the 
Acts  of  1842  and  1853,  with  subsequent  amendments, 
is  taken  mainly  from  Williams'  The  King's  Revenue, 
a  most  admirable  compilation,  which  should  be  fre- 
quently consulted  by  every  student  of  British  finance. 

"  Schedule  A.  —  For  and  in  respect  of  the  property 
in  all  lands,  tenements,  hereditaments,  and  heritages 
in  the  United.  Kingdom,  and  to  be  charged  for  every 
twenty  shillings  ^  of  the  annual  value  thereof  : 

^'-Schedule  B.^Yov  and  in  respect  of  the  occupa- 
tion of  all  such  lands,  tenements,  hereditaments,  and 
heritages,  as  aforesaid,  and  to  be  charged  for  every 
twenty  shillings ^  of  the  annual  value  thereof  : 

'"'•Schedule  C,  —  For  and  in  respect  of  all  profits 
arising  from  interest,  annuities,  dividends,  and  shares 
of  annuities  payable  to  any  person,  body  politic  or 
corporate,  company  or  society,  whether  corporate  or 

*  P.  115,  National  Budget. 

2  See  below  for  "deductions"  allowed.  Under  ^  only  one- 
third  the  annual  value  is  now  charged.     The  text  gives  the  old  law. 


CHAP.  IX  PERSONAL    TAXES  323 

not  corporate,  out  of  any  public  revenue,  and  to  be 
charged  for  every  twenty  shillings  of  the  annual 
amount  thereof : 

'-'•  Schedule  I) ,  —  For  and  in  respect  of  the  annual 
profits  or  gains  arising  or  accruing  to  any  person  'T~" 
residing  in  the  United  Kingdom  from  any  kind  of  ^^^ 
property  whatever,  whether  situate  in  the  United 
Kingdom  or  elsewhere,  and  for  and  in  respect  of  the 
annual  profits  or  gains  arising  or  accruing  to  any 
person  residing  in  the  United  Kingdom  from  any 
profession,  trade,  employment,  or  vocation,^  whether 
the  same  shall  be  respectively  carried  on  in  the 
United  Kingdom  or  elsewhere,  and  to  be  charged 
for  every  twenty  shillings  of  the  annual  amount  of 
such  profits  and  gains  : 

"  And  for  and  in  respect  of  the  annual  profits  or 
gains  arising  or  accruing  to  any  person  whatever, 
and  whether  a  subject  of  His  Majesty  or  not,  al- 
though not  resident  within  the  United  Kingdom, 
from  any  property  whatever  in  the  United  Kingdom, 
or  any  profession,  trade,  employment,  or  vocation, 
exercised  within  the  United  Kingdom,  and  to  be 
charged  for  every  twenty  shillings  of  the  annual 
amount  of  such  profits  and  gains  : 

"And  for  and  in  respect  of  all  interest  of  money, 
annuities,  and  other  annual  profits  and  gains  not 
charged  by  virtue  of  any  of  the  other  schedules  con- 
tained in  this  Act,  and  to  be  charged  for  ever)- 
twenty  shillings  of  the  annual  amount  thereof : 
1  See  lower  rates  for  "  earned  "  incomes,  explained  below. 


324         INTRODUCTION   TO  PUBLIC  FINANCE     part  n 

''''Schedule  E.  — For  and  in  respect  of  every  public 
office  or  employment  of  profit,  and  upon  every  an- 
nuity, pension,  or  stipend  payable  by  His  Majesty  or 
out  of  the  public  revenue  of  the  United  Kingdom, 
except  annuities  charged  to  the  duties  under  the 
said  Schedule  (7,  and  to  be  charged  for  every  twenty 
shillings  of  the  annual  amount  thereof." 

All  incomes  not  exceeding  £160  are  exempt. 
The  following  "abatements"  are  allowed  on  all 
classes  of  income:  £160  on  all  incomes  exceeding 
X160  and  not  exceeding  X400;  ,£150  on  incomes 
exceeding  £400  and  not  exceeding  £500;  £120 
on  all  incomes  exceeding  £500  and  not  exceeding 
£600;  £70  on  all  incomes  exceeding  £600  and 
not  exceeding  £700. 

The  following  "deductions"  (not  called  abate- 
ments) are  allowed  under  Schedule  J.,  namely,  one- 
eighth  in  respect  of  lands,  and  one-sixth  in  respect 
of  houses  for  repairs,  etc.  That  is,  income  from 
lands  is  charged  at  17s.  6c?.  for  each  pound,  and  that 
from  buildings  at  16^.  M.  per  pound. 

"Relief,"  in  the  form  of  a  reduced  rate,  is  given 
by  an  act  passed  in  1907  to  "earned"  incomes,  in 
addition  to  all  other  exemptions,  abatements,  or 
deductions.  "  Earned  "  income  means  — 
^y^  {a)  "  any  income  arising  in  respect  of  any  office 
or  employment  of  profit  held  by  the  individual,  or 
in  respect  of  any  pension,  superannuation,  or  other 
allowance,  deferred  pay,  or  compensation  for  loss  of 
office  given  in  respect  of  the  past  services  of  the  in- 


CHAP.  IX  PERSONAL    TAXES  325 

dividual,  or  of  tlie  husband  or  parent  of  the  indi- 
vidual, in  any  office  or  employment  of  profit  .  .  .; 
and 

(5)  "any  income  from  any  property  which  is 
attached  to  or  forms  part  of  the  emoluments  of  any 
office  or  employment  of  profit  held  by  the  individual; 
and 

((?)  "  any  income  which  is  charged  under  Sched- 
ules B  or  D,  and  is  immediately  derived  by  the  indi- 
vidual from  the  carrying  on  or  exercise  by  him  of 
his  profession,  trade,  or  vocation,  either  as  an  indi- 
vidual, or,  in  the  case  of  a  partnership,  as  a  partner 
acting  therein." 

This  "relief"  extends  only  to  earned  incomes  up 
to  ^2000. 

The  reader  should  note  the  careful  distinction 
made  in  the  law  between  "persons"  and  "individ- 
uals." The  former  includes  legal  persons,  such  as 
joint  stock  companies  and  corporations  other  than 
governmental.  This  is  especially  important  under 
Schedule  D. 

"The  annual  value  of  lands,  etc.,  charged  under 
Schedule  A,  is  understood  to  be  the  rent  by  the  year 
at  which  the  same  are  let  at  rack-rent,  if  the  amount 
of  such  rent  shall  have  been  fixed  by  agreement  com- 
mencing within  the  period  of  seven  years  preceding 
the  fifth  day  of  April  next  before  the  time  of  making 
the  assessment,  but  if  the  same  are  not  so  let  at  rack- 
rent,  then  at  the  rack-rent  at  which  the  same  are 
worth  to  be  let  by  the  year."     This  rule  does  not 


326        iSfTRODUCTION  TO  PUBLIC  FINANCE     part  il 

apply  to  tithes,  quarries,  mines,  etc.,  but  does  apply 
to  lands,  etc.,  capable  of  actual  occupation,  no  matter 
how  enjoyed. 

"Only  one-third  of  the  annual  value  is  charged 
under  Schedule  B  ;  nurseries  and  gardens  are  charged 
under  Schedule  i>."  Mortgages  are  taxed  under 
Schedule  A,  owners  being  allowed  to  deduct  what 
they  advance  in  taxes  from  the  interest  they  pay. 
Owners  in  occupation  pay  under  Schedule  B. 

Clergymen  or  ministers  of  religion  are  allowed  a 
deduction  of  one-eighth  on  the  value  of  any  dwell- 
ing-house for  which  they  pay  rent,  in  respect  of  the 
portion  of  it  which  they  may  use  for  official  purposes. 

The  greatest  difficulties  of  assessment  arise  under 
Schedule  i>,  and  in  1907  the  assessors  were  empow- 
ered to  require  an  employer  to  give  particulars  of 
name,  residence,  and  pay  of  any  employees,  and  every 
person  is  made  liable  to  be  called  upon  to  make  a 
full  return  of  his  or  her  income.  Normally  the  in- 
come taxable  is  the  average  of  the  profits  or  gains 
for  the  past  three  years,  but  if  the  taxpayer  so  elect, 
he  may  be  assessed  on  the  actual  amount  of  profits 
and  gains  for  the  year.  Commissioners  are  empow- 
ered to  make  deductions  in  respect  of  "wear  and 
tear"  of  machinery  or  plant  used,  and,  generally 
speaking,  the  assessable  profits  are  what  are  left  after 
deduction  of  all  outgoings  attributable  to  the  ex- 
penses of  materials,  labour,  etc.  Individuals  are 
allowed  to  deduct  life  insurance  premiums  paid. 

Many  of  the  terms  used  in  the  schedules  as  quoted 


CHAP.  IX  PERSONAL    TAXES  327 

above  will  probably  be  unintelligible  to  American 
readers,  as  some  of  the  forms  of  income  to  which 
they  apply  are  not  found  in  the  United  States,  or  at 
least  are  not  commonly  recognised  as  distinct  classes. 
On  that  account  the  following  exhibit  of  the  amount 
of  income  *'  brought  under  review "  by  the  depart- 
ment administering  this  tax  will  probably  prove 
instructive.  The  details  of  gross  income  are  for 
the  fiscal  year  1905-1906,  and  the  whole  table  is 
from  Williams,  The  King's  Revenue. 

Schedule  A.  Profits  from  the  ownership  of: 

Lands £52,151,543 

Houses        .        .        .        .        .        205,486,455 
Other  property    ....  1,310,673 


£258,948,671 
Schedule  B.   Profits  from  the  occupation  of 
lands  (farmers'  profits  mainly)  ....  17,460,062 

Schedule  C.  Profits  from  British,  Indian, 
colonial,  and  foreign  government  securities        .  46,925,674 

Schedule  D.  Profits  from  businesses,  con- 
cerns, professions,  employments  (except  the 
last  of  a  public  nature,  see  Schedule  E)  and  cer- 
tain interest : 

I.  Businesses,  professions, 
etc.  (including  sala- 
ries of  employees), 
other  than  those  enu- 
merated below  .  .  £367,814,155 
II.   Railways  in  the  United 

Kingdom  .        .        .  41,241,692 

III.  Mines    ....  19,999,972 

IV.  Gasworks     .        .        .  7,413,611 

Carried  forward  £323,334,407 


328 


INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 


V. 
VI. 

vir. 

VIII. 

IX. 

X. 


XI. 
XII. 

xni. 


XIV. 
XV. 

XVI. 

XVII. 

XVIII. 

XIX. 


Brought  forward         £323,334,401 


Iron  works    . 

Waterworks . 

Canals,  etc.  . 

Quarries 

Markets,  tolls,  etc. 

Fishings  in  the  United 
Kingdom  and  sport- 
ing rights  in  Ireland 

Cemeteries    . 

Salt  springs  or  works 
and  alum  works 

Indian,  colonial,  and 
foreign  securities 
{other  than  govern- 
ment) 

Coupons 

Railways    out    of 
United  Kingdom 

Loans    secured   on 
public  rates 

Other  interest 

Other  profits 

Profits  from  the  occu- 
pation of  lands,  the 
occupiers  of  which 
have  elected  to  be 
assessed  under  Sched- 
ule D  ... 


the 


the 


2,683,637 
5,816,300 
3,847,201 
1,695,799 
869,635 


203,3041 
183,612 

150,573 


14,794,821 
12,061,156 

16,111,221 

6,687,134 
4,677,654 
2,399,047 


13,821 


Schedule  E.   Salaries  of  government,  corpo- 
ration, and  public  company  officials    . 


£508,664,345 
£  93,185,804 


Total  gross  income  brought    under    review 

1905-1906    

Less  deductions,  abatements,  etc. 
Taxed  income 


925,184,556 

293,159,810 

£632,024,746 


1  Some  sporting  rights  are  under  Schedule  A. 


PERSONAL    TAXES 


329 


The  income  taxes  are,  whenever  possible,  "  stopped 
at  the  source,"  that  is,  they  are  paid  to  the  govern- 
ment before  the  income  (the  rents,  interest,  salaries, 
etc.)  is  paid  over  to  the  recipient.  This  has  long 
been  considered  the  characteristic  feature  of  the 
British  income  tax.  Williams  estimates  that  two- 
tliirds  of  the  taxes  are  thus  indirectly  collected. 
Stoppage  at  the  source  applies  to  practically  all  of 
Schedule  A  and  to  all  of  Schedules  C  and  E.  On 
account  of  the  definiteness  of  incomes  under  Sched- 
ule B  the  collection  is  equally  certain.  Even  under 
Schedule  D  many  items  can  be  stopped  at  the  source. 

The  following  hypothetical  case  of  a  composite  in- 
come of  X5000  per  annum  given  by  Williams  will 
illustrate  some  of  the  more  puzzling  points: 


Reference 
Number 

Schedule 

Item 

Amount 

1 

A 

Profits  from  the  ownership  of  lands, 

houses,  etc. 

£500 

2 

B 

Profits  from  the  occupation  of  lands 

at  one-third  the  annual  value 

200 

3 

C 

Profits  from  government  securities 

200 

4 

D 

Profits  as  an  author 

100 

5 

D 

Profits  as  a  solicitor  (partner  in  a 

firm  — total  profits,  £5000) 

2500 

6 

D 

Profits  from  investments  in  a  public 

company  (total  profits,  £55,000) 

500 

7 

D 

Profits  from  investments  in  munici- 

pal stock 

100 

8 

D 

Profits  from  investments  in  foreign 
bonds  payable  by  coupons  cashed 

in  the  United  Kingdom 

100 

9 

D 

Salary  as  a  land  agent 

500 

10 

E 

Salary  as  a  borough  auditor 

300 

Total 

£5000 

^ 


330        INTRODUCTION  TO  PUBLIC  FINANCE     part  ii 

The  method  of  taxing  items  1,  2,  and  3  are  simple 
and  require  no  explanation. 

Item  4  is  income  as  an  individual  and,  although 
not  over  XI 60,  is  not  exempt  because  this  individual's 
total  income  is  over  <£160.  It  is,  however,  "  earned" 
income  and  would  be  entitled  to  "relief"  but  for  the 
fact  that  the  total  of  this  individual's  income  is  over 
X2000. 

Item  6  requires  no  explanation. 

Item  6  is  income  on  which  the  tax  would  be  paid 
by  the  company,  as  a  "person"  having  income  be- 
yond the  limits  of  any  abatements,  that  is,  X55j000, 
the  highest  sum  entitled  to  abatement  being  <£700. 
^©¥ei»f|P  the  hypothetical  individual  in  this  case  had 
less  than  X700,  instead  of  X5000  income,  he  would 
receive  m^  abatement  on  this  item.  Technically  this 
tax  is  collected  directly  and  not  "  stopped  at  the 
source,"  but  so  far  as  the  individual  is  concerned,  the 
effect  is  much  the  same.  This  is  the  only  item  "  net," 
less  the  tax  appearing  in  the  list. 

The  taxes  on  all  the  remaining  items,  7  to  10  in- 
clusive, are  "  stopped  at  the  source"  that  on  8  being 
withheld  by  the  banker  or  broker  when  he  cashes  the 
coupons. 

The  income  tax  is  the  variable  element  in  British 
finance,  and  the  rate  is  fixed  each  year  with  reference 
to  the  needs  of  the  government.  From  1896  to  1900 
the  rate  was  M.  in  the  pound  ;  1900-1901,  Is. ;  1901- 
1902,  U.  2d.  ;  1902-1903,  Is.  2>d.  ;  1903-1904,  11^^. ; 
1904  —  1908,  Is.     But  since  1906,  "earned"  incomes 


CHAP.  IX  PERSONAL    TAXES  331 

paid  only  M.  There  are  many  other  interesting 
points  connected  with  the  British  income  tax  for 
which  the  reader  is  referred  to  the  larger  treatises. 

Sec.  6.  The  United  States  federal  government  has 
made  two  attempts  to  establish  an  income  tax.  The 
first  was  a  war  measure,  and  was  repealed    , 

■*■  Income  taxes 

as  soon  as  the  pressing  necessity  was  re-  in  the  United 
moved.  The  second  was,  like  the  Eng-  '^^"^^'*- 
lish  income  tax  in  1842,  a  means  to  make  up  the 
estimated  deficit  resulting  from  the  repeal  of  the 
protective  duties.  It  failed  to  go  into  effect,  how- 
ever, as  the  Supreme  Court  could  not  be  convinced 
of  its  constitutionality. 

We  shall  consider  the  Civil  War  tax  first.  ^  The 
Constitution  provides : 

"  No  Capitation,  or  other  direct.  Tax  shall  be  laid, 
unless  in  Proportion  to  the  Census  or  Enumeration 
hereinbefore  directed  to  be  taken."     Article  I.,  sec.  9. 

Also,  "  Representatives  and  direct  Taxes  shall  be 
apportioned  among  the  several  States  which  may  be 
included  within  this  Union,  according  to  their  re- 
spective Numbers,  which  shall  be  determined  by  add- 
ing to  the  whole  Number  of  free  Persons,  including 
those  bound  to  Service  for  a  Term  of  Years,  and  ex- 
cluding Indians  not  taxed,  three-fifths  of  all  other 
Persons."     Article  I.,  sec.  2. 

And,  "...  all  Duties,  Imposts,  and  Excises  shall 
be  uniform  throughout  the  United  States."     Article 
I.,  sec.  8. 
1  See  Quarterly  Journal  of  Economics,  VIII.,  4  ;  also  July,  1889. 


332         INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

Early  in  the  search  for  revenues  to  support  the 
war  a  proposition  was  made  for  the  apportionment 
of  a  tax  of  130,000,000  in  accordance  with  these  pro- 
The  Civil  War  visions.  But  it  was  felt  that  population 
income  tax.  ^^s  uo  measurc  of  the  wealth  of  the  dif- 
ferent states,  and  that  such  an  apportionment  in 
1861  would  not  result,  as  one  in  1789  might  have 
done,  in  imposing  fairly  equal  burdens  upon  all  the 
citizens.  In  lieu  thereof,  an  income  tax  of  3  per  cent 
on  all  incomes  with  an  exemption  of  $800  was  voted. 
In  the  case  of  Springer  v,  the  United  States,  102  U.  S. 
586,  the  Supreme  Court  decided  that  such  a  tax  could 
be  levied,  since  it  was  not  a  direct  tax  within  the 
meaning  of  the  Constitution. 

The  tax  was  to  go  into  force  a  year  later.  But 
in  1862  it  was  amended,  making  the  deduction  $600 
and  the  rate  progressive.  Incomes  from  1600-810,000 
(less  1600)  paid  3  per  cent,  all  over  that  5  per  cent. 
In  that  form  it  went  into  effect.  The  great  war  tax 
law  of  June  30,  1864,  made  the  rates  as  follows  :  5 
per  cent  on  the  excess  over  1600  up  to  $5000  ;  7J 
per  cent  on  the  excess  over  $5000  up  to  $10,000  ; 
and  10  per  cent  on  the  excess  over  $10,000.  But 
again,  before  the  law  went  into  effect,  the  7J  per  cent 
rate  was  cut  out  and  10  per  cent  was  collected  from 
all  incomes  over  $5000.  On  all  incomes  derivable 
from  the  public  funds  ^  the  tax  was  stopped  at  the 
source.  In  1867  the  tax  was  reduced  and  the  rate 
made  5  per  cent  with  an  exemption  of  $1000,  and  it 
1  Except  interest  on  bonds. 


CHAP.  IX  PERSONAL    TAXES  333 

remained  thus  until  1870.  The  income  tax  was,  in 
a  way,  conjoined  with  one  on  corporations,  banks, 
insurance  companies,  railroads,  etc.  The  part  of  the 
individual's  income  taxed  in  this  latter  way  was  de- 
ducted before  the  income  was  assessed.  No  attempt, 
however,  was  made  to  make  the  rate  of  this  tax  pro- 
gressive. It  was  first  3  per  cent  and  later  5  per  cent, 
and  there  were  no  exemptions.  The  assessment  was 
made  on  the  basis  of  a  written  declaration  by  the  tax- 
payer, subject  to  correction  by  such  information  as 
the  assessor  could  gather.  Generally  the  information 
upon  which  the  tax  was  assessed  was  published  in 
the  newspapers.  During  the  period  when  patriotic 
feeling  ran  high,  incomes  were  well  returned  and  the 
proceeds  of  the  tax  were  large.  After  that,  evasion 
by  false  declaration  became  prevalent  and  the  re- 
turns fell  off  materially.  With  the  general  removal 
of  war  taxes  in  1870  the  income  tax  fell  away.  The 
protective  policy,  which  demanded  the  retention  of 
the  customs  duties,  rendered  it  possible  to  do  without 
the  revenue  from  this  source. 

The  reduction  of  the  customs  duties  in  1894,  and 
the  probability  of  a  falling  off  in  the  revenues  from 
this  source  led  to  the  second  income  tax.^  T^/^e  inccmm 
The  law  for  this  tax,  faultily  drawn  and  tax  of  1894. 
more  or  less  incorrect  in  principle,  was  declared  un- 
constitutional by  the  Supreme  Court  in  1895  before 
it  went  into  effect.  The  grounds  for  this  decision, 
which  reversed  that  in  the  case  of  Springer  v.  the 
1  Quarterly  Journal  of  Economics^  IX.,  1. 


834         INTRODUCTION   TO  PUBLIC  FINANCE     part  ii 

United  States,  by  which  the  other  tax  law  had  been 
tested,  were  that  the  tax  was  a  direct  tax  and  also 
not  uniform  inasmuch  as  all  incomes  below  $4000 
were  exempt.  As  the  decision  now  stands,  no  in- 
come tax  can  be  levied  by  the  federal  government 
without  a  constitutional  amendment. ^ 

This  income  tax  was  to  be  for  five  years,  commenc- 
ing 1895.  It  was  degressive,  at  2  per  cent,  on  all 
incomes  in  excess  of  $4000.  It  was  levied  upon 
"  the  gains,  profits,  and  income  "  of  all  citizens  and 
residents,  "derived  from  any  kind  of  property,  rents, 
interest,  dividends,  or  salaries,  or  from  any  profes- 
sion, trade,  employment,  or  vocation,"  "  or  from  any 
other  source  whatever."  Debts,  and  interest  thereon 
were  exempt.  The  cost  of  stocking  the  farm  and 
home  consumption  of  products  were  not  included. 
Accretions  by  gift  or  inheritance  were  to  be  counted 
as  income.  All  persons  having  an  income  of  over 
$3500  were  required  to  declare  their  incomes.  The 
individual  stockholder  in  a  corporation  was  allowed 
to  deduct  the  income  from  his  shares  in  making  his 
return.  Public  corporations  were  exempt,  but  other 
corporations  were  not.  State  and  local  taxes  except 
special  assessments  might  be  deducted.  United 
States  officials  were  taxed  on  their  salaries.  Returns 
were  to  be  confidential. 

It  will  easily  be  seen  that  this  was  a  combina- 
tion  of    an    income   tax    with   an   inheritance   and 

1  In  1909  Congress  submitted  to  the  states  for  approval  a  con- 
stitutional amendment  permitting  the  federal  government  to  levy 
an  income  tax. 


CHAP.  IX  PERSONAL    TAXES  335 

corporation  tax.  That  it  would  necessarily  have 
worked  badly  on  that  account  is  not  clear.  The 
rate  was  so  low  and  the  exemptions  so  liberal  that 
pretty  full  returns  might  have  been  anticipated. 
The  law,  however,  was  loosely  drawn,  faulty  in 
wording,  and  even  contained  clauses  taken  from  the 
laws  of  the  Civil  War  tax  having  no  possible  meaning 
or  bearing  in  the  connection  in  which  they  were  used. 
No  attempt  was  made  to  adjust  the  tax  to  the  exist- 
ing burden  of  state  and  local  taxes. 

The  taxation  of  income  by  the  commonwealths  of 
the  United  States  is  rare  and  entirely  without  lead- 
ing principles.  In  Virginia  alone  there  is  a  general 
income  tax.  It  is  supposed  to  be  a  tax  of  10  per 
cent  on  all  incomes  over  $1000.  But  the  returns 
obtained  in  this  commonwealth  are  insignificant  be- 
cause of  the  lax  assessment.  Partial  income  taxes,  in- 
tended to  supplement  the  personal  property  taxes  and 
to  cover  the  annual  saving,  exist  in  Massachusetts, 
Pennsylvania,  Tennessee,  and  North  Carolina. ^ 

1  See  Seligman,  "Finance  Statistics,"  Publications  of  The 
American  Statistical  Association,  New  Series,  8,  December,  1889. 
Also  the  Special  Report  of  the  United  States  Census  Bureau  (1907) 
on  Wealth-Debt  and  Taxation,  and  Kinsman,  The  Income  Tax  in 
the  Commonwealths  of  the  United  States. 


CHAPTER   X 

THE  INCIDENCE   OF   TAXATION 

Section  1.  We  postponed  a  treatment  of  the 
(question  of  incidence  in  connection  with  each  tax, 
,    .,        ,       because  the  incidence  of  any  tax  depends 

Incidence  de- 
pends upon       upon  its  place  in  the  system.      It  seems, 

the  system.        therefore,  better  to.  treat  the  subject  by 

itself  in  such  a  way  that  every  tax  can  be  considered 

in  its  connection  with  other  taxes.     The  problems 

of  this  part  of   the  subject  are  many  and  difficult. 

In  an  elemjentary  treatise,  all  that  can  be  done  is  to 

suggest  methods  of   study  and  a  very  few  of  the 

more  simple  principles. 

By  the  term  "  shifting  "  is  meant  the  transference 

of  the   burden   of   a  tax  from   the   payer  to  some 

The  meaning     other  pcrson  or  pcrsous.      Bv  the  "  final 

of  shifting        incidence"  is  meant  the  falling  of   the 

and  of  xnci-  ^ 

dence.  burden,  without  possibility    of    further 

shifting,  upon  some  particular  revenue,  property, 
expenditure,  or  person.  This  may  be  illustrated  by 
two  very  simple  cases.  An  American  bookseller  in  a 
college  town  imported  some  books  from  England  for 
the  use  of  the  students.  He  paid  the  duty  to  the 
custom  house,  but  collected  it  again  from  the  stu- 
dents in  the  shape  of  an  addition  to  the  price  of  the 

336 


CHAP.  X  THE  INCIDENCE    OF   TAXATION  337 

books.  The  bookseller  shifted  the  tax.  The  final 
incidence  was  on  the  students.  In  this  case,  the  shift- 
ing was  expected  by  the  lawmaker.  It  was  to  save 
the'expense  of  hunting  up  and  taxing  each  user  of 
the  books  in  question,  that  the  seller  was  made  to 
pay  the  tax,  or  to  be  the  agent  of  the  government  in 
collecting  it.  Since  the  students  thus  taxed  cannot 
shift  the  burden,  we  need  not  investigate  this  case 
further.  Again  :  in  California,  the  commonwealth 
and  local  taxes  paid  by  the  mortgagee  amount  on 
the  average  to  about;  1|  per  cent.  The  current  rate 
of  interest  on  the  best  untaxed  loans,  in  and  around 
San  Francisco,  is  about  6  per  cent,  but  on  mortgages, 
in  spite  of  the  good  security,  it  has  been  almost 
invariably  8  per  cent,  or  more.  In  this  case,  the 
morgagee  shifts  the  tax,  and  its  incidence  is  on 
the  mortgagor.  This  may  be  its  final  incidence, 
or  it  may  be  conceivably  possible  for  the  mort- 
gagor to  shift  the  burden  to  the  tenant  of  the 
mortgaged  property  in  the  shape  of  higher  rents,  or 
to  the  purchasers  of  the  commodities  raised  on 
the  property  in  higher  prices.  This  last  illustra- 
tion shows  how  complicated  the  problem  of  incidence 
may  be. 

Sec.  2.  Each  and  every  tax  must  be  studied  in 
its  proper  connection  if  it  is  desired  to  know  to 
what  extent  the  aims  of  taxation  are  Shifting  may 
realised.  Sometimes  the  shifting  of  the  /Ja^^Ie^wr-^' 
tax  defeats  the  general  purpose,  as  in  -pose  of  the  tax. 
the  case  of   the  tax  on  the  mortgagee's  interest  in 


«J8  \    INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

California,  while  in  others  the  general  purpose  can 
only  be  accomplished  when  the  tax  is  shifted.  The 
process  of  shifting,  like  every  other  economic  trans- 
fer of  burdens,  costs  something.  No  person  ad- 
vances the  amount  of  the  tax  with  the  intention  of 
transferring  it  to  some  other  without  desiring  to  be 
paid  for  his  trouble  and  risk.  Unless  the  conditions 
are  against  him,  he  will  succeed  in  getting  paid  for 
it.  Thus,  the  importer  of  books  tries  to  get  a 
certain  profit  on  the  cost  to  him,  which  is  composed 
of  the  price  in  England  plus  the  cost  of  transporta- 
tion and  the  duty.  If  the  rate  of  profit  or  commis- 
sion which  he  reckons  is  10  per  cent,  he  adds  10 
per  cent  of  the  duty  as  well  as  of  the  other  items. 
The  money  which  he  has  advanced  on  the  duty  must 
bring  him  its  share  of  the  earnings.  So  in  the  case 
of  the  mortgages  in  California.  One-quarter  of 
one  per  cent  interest,  or  more,  is  usually  charged 
above  the  rate  plus  the  tax.  If  the  lender  has  to 
suffer  the  annoyance  and  run  the  risk  of  paying 
Shifting  is  a  the  tax,  he  will  have  to  be  reimbursed. 
cosUy  process.  Shifting  is,  therefore,  an  undesirable  and 
costly  process,  and  is  to  be  avoided  unless  there 
is  some  clear  saving,  as  in  the  case  of  the  customs 
duties. 

Sec.  3.    The  aims  of  taxation,  the  accomplishment 

of  which  shifting  may  aid  or  defeat,  have  been  stated 

in  the  form  of  canons.     The  oldest  and  most  famous 

are  the  four  of  Adam  Smith. ^     The  fourth  of  these 

1  Wealth  of  Nations,  Bk.  V.,  Chap.  II.,  Part  II. 


CHAP.  X  THE   INCIDENCE    OF   TAXATION  339 

famous  canons  bears  directly  upon  the  problem  in 
hand.     Shifting  adds  to  the  burden  without  adding 
to  the  revenue  coming  into  the  treasury.  Sometimes  a 
Sometimes,  however,  by  assessing:  the  tax  ^^^^^^^  ^^^  *'^ 

^  more  produc- 

upon  a  part  of  a  great  economic  process  Hve. 
and  permitting  of  a  certain  shifting,  the  tax  is  made 
more  productive  to  the  treasury.  Now  it  is  clear 
that  the  first  duty  of  the  fiscal  officer  is  to  fill  the 
treasury  as  quickly  and  easily  as  possible.  He  has, 
therefore,  no  right  to  pass  over  a  tax  that  is  produc- 
tive, in  favour  of  one  that  is  not,  simply  because  the 
one  is  shifted  and  the  other  is  not.  If,  however,  it 
can  be  seen  that  the  incidence  is  such  as  to  entirely 
derange  the  system  adopted  and  defeat  the  general 
aims,  an  attempt  must  be  made  to  prevent  it.  If  a 
tax  can  be  found  that  is  productive  and  at  the  same 
time  is  not  shifted,  it  will  be  preferred  to  one  that  is 
shifted. 

It  follows  directly  from  the  fact  that  a  tax  should 
be  as  "  productive "  as  possible,  that  those  taxes 
chosen  should  have  as  little  repressive  effect  as  pos- 
sible. ^  For,  to  destroy  the  phenomenon  is  to  lose 
the  return. 

Sec.  4.    Let  us  suppose  that  the  ideal  by  which 

all  systems  are  to  be  tested  is  that  the  total  taxation 

shall  impose  a  slightly  progressive  burden  upon  all 

incomes.     Then   it  is  necessary  to   examine  all  the 

1  See  Bastable,  pp.  388,  389,  for  the  same  idea ;  also  Ross,  "  A 
New  Canon  of  Taxation,"  Political  Science  Quarterly,  Vol.  VII.  . 
This  is  no  very  new  canon.     Adam  Smith  said  :  "  Taxation  should 
retard  as  little  as  possible  the  growth  of  wealth." 


340         INTRODUCTION   TO  PUBLIC  FINANCE 


PART   IV         I 

!  how      I 


taxes  with  their  various  shiftings  and  to  see 
the  total  shifting  affects  the  final  result.^  It  is  a 
fundamental  principle,  too  often  overlooked  in  the 
discussion  of  incidence,  and  one  that  cannot  be  too 
frequently  restated,  that  the  possibility  of  shifting 
Shifting  can-  depends  largely  upon  the  relation  of  the 
not  take  place    ^^^  -^^  question  to  the  other  parts  of  the 

when  the  tax  ^  ^ 

is  universal,  system.  Let  US  usc  an  old  illustration  : 
the  tax  on  mortgages  is  in  California  shifted  to  the 
mortgagor  because  there  are  other  investments  for 
capital  that  escape  taxation.  If  every  possible 
channel  into  which  capital  might  go  led  to  the  pay- 
ment of  a  similar  tax,  it  would  not  be  so  possible  as 
it  now  is  to  shift  this  tax.  It  is  not  quite  true  that 
the  tax  would  not  be  shifted  at  all,  but  it  certainly 
could  not  be  so  universally  shifted.  We  shall  see 
later  when  it  may  be  shifted.  If  w^e  had  a  tax 
system  so  arranged  as  to  fall,  in  the  first  instance, 
upon  all  parts  of  each  individual's  income,  —  an 
unattainable  ideal,  —  there  could  be  but  little  shift- 
ing. But  when  a  part  of  the  nation's  wealth  is 
exempt,  taxes  upon  all  wealth  that  might  be  trans- 
ferred into  this  exempt  form  are  peculiarly  liable  to 
be  shifted. 

Sec.  5.   We  shall  now  look  at  the  incidence  of  the 

1  There  have  been  many  theories  which  have  undertaken  to 
explain  the  final  incidence  of  all  taxation  on  some  other  plan  than 
that  of  an  examination  of  all  the  different  taxes.  Professor  Selig- 
man  discusses  ten  different  classes  of  theories  in  regard  to  inci- 
dence of  which  only  two  require  this  method.  See  Shifting  and 
Incidence  of  Taxation. 


CHAP.  X  THE  INCIDENCE    OF  TAXATION  341 

more  important  taxes,  taking  them  in  the  order  of 
our  previous  discussion.     Excise  taxes  and  customs 
duties,  so  far  as  the  latter  yield  a  revenue  Shifting  of 
and   fall   upon    citizens    of  the  country  ^^'^J^^  ^«^^* 

•■-  "^     and  customs 

laying  them,^  are  for  our  present  purpose  duties. 
the  same.  They  are  classed  by  Professor  Seligraan 
as  "virtually  one  form  of  the  profits  tax,"  which, 
'4n  the  great  majority  of  cases,"  will  be  "shifted 
in  whole  or  in  greater  part."  What  Professor 
Seligman  says  upon  this  point  ^  is  true  enough  and 
very  clear,  but  we  shall  follow  a  somewhat  different 
analysis. 

In  the  case  of  these  taxes  it  is  the  intention  of  the 
lawmaker  that  the  tax  shall  be  shifted  to  the  con- 
sumer. If  any  of  it  remains  on  the  producer  or 
importer,  it  may  be  said  to  have  been  shifted  back. 
This  takes  place  sometimes :  (1)  if  the  taxed  com- 
modity is  produced  as  a  monopoly,  and  the  price  is 
already  as  high  as  the  traffic  will  bear,  i.e.  the  addi- 
tion of  the  tax  to  the  price  would  lessen  the  Sj,le, 
then  a  part  or  the  whole  of  the  tax  comes  out  of  the 
profits  of  the  monopolist ;  (2)  a  new  tax  on  some 
commodity  produced  by  a  large  plant  of  fixed  capital, 
not  easily  transferable  to  other  lines,  may  remain 
on  the  producer.  In  all  other  cases  an  excise  or  an 
import  tax  cannot  be  shifted  from  the  consumer. 

Sec.  6.  The  general  property  tax  consists  of  a 
number  of  different  parts  which  are  best  considered 

1  See  Chap.  VII.  for  shifting  to  foreigners. 

2  See  p.  140  ff.,  and  p.  177. 


342         INTRODUCTION   TO  PUBLIC  FINANCE      part  ii 

separately.     Such  a  separation  is  legitimate  since  the 
.    .,         tax  falls  apart  in  the  practice  of  assess- 

The  incidence  ^  ^ 

of  the  general  ment.  It  falls  naturally  into  at  least  two 
property  tax.  great  divisions,  a  tax  on  real  estate  and  a 
tax  on  personal  property.  The  tax  on  real  estate 
may  be  regarded  as  of  two  parts,  a  tax  on  land  and  a 
tax  on  buildings.  In  the  general  property  tax,  the 
tax  on  land  is  assessed  according  to  the  selling  value. 
When  the  land  is  used  for  agricultural  purposes,  the 
incidence  of  the  tax  lies  between  the  owner  and  the 
user  of  the  commodities  produced.^  Can  the  owner 
shift  the  tax  to  the  consumer?  If  this  happens,  it 
means  a  rise  in  prices  which  again  means  an  exten- 
sion of  the  margin  of  cultivation,  marginal  lands 
being  untaxed,  as  having  no  price,  or  less  heavily 
taxed.  But  such  a  rise  in  price  may  affect  consump- 
tion and  lessen  the  demand  at  the  same  time  that  it 
tempts  to  the  creation  of  a  new  supply,  thus  induc- 
ing a  fall  in  prices.  But  as  cultivators  of  land  do 
not  readily  withdraw  from  their  position,  those  on  or 
near  the  margin  of  cultivation  will  suffer  severely, 
but  will  generally  hold  on  until  their  profits  are 
gone,  often  until  they  are  ruined.  The  conditions 
under  which  agricultural  products  are  sold  to-day 
are  beyond  the  control  of  any  one  set  of  producers. 
The  full  burden  of  the  taxes  upon  agricultural 
land,   therefore,    falls    upon   the    farmers.      In   the 

1  For  America,  the  tenant  may  be  considered  as  a  consumer  of 
utilities,  residence,  etc.;  so 'few  farms,  or  productive  lands,  are 
rented  that  they  need  not  be  considered. 


CHAP.  X  THE  INCIDENCE    OF  TAXATION  343 

United  States,  inasmuch  as  the  farmers  are  seldom 
the  owners  of  any  considerable  amount  of  in  the  United 
untaxed  personal  property,  they  bear  far  ^!^^^^  ^^^ 

^  X       i.         ./  J  farmers  are 

more  than  their  proportionate  share  of  the  overtaxed. 
commonwealth  taxes  and  often  also  of  the  local  taxes. 
When  land  is  used  for  other  purposes  than  agri- 
culture, it  is  generally  best  considered  in  connection 
with  the  buildinsfs  on  it.     The  incidence    ,    .^ 

*^  Incidence  of  a 

of  the  general  property  tax  on  houses  and  tax  on  buHd- 
the  land  they  occupy  will  vary  from  lo-  *"^*' 
cality  to  locality  with  the  demand  for  such  houses 
an^jthe  supply.  Houses  cannot  be  readily  torn  down 
or  fundamentally  altered  without  great  loss  ;  conse- 
quently if  the  supply  of  rentable  houses  is  larger  than 
the  demand,  the  tax  on  the  buildings  will  fall  wholly  on 
the  owner.  It  can  be  shifted  to  the  tenant  only  when 
the  supply  of  houses  is  very  limited.  In  America 
these  two  cases  are  both  frequently  illustrated. 

The  incidence  of  that  part  of  the  general  property 
tax  which  is  assessed  upon  personal  property  or  upon 
invested  capital  is  very  difficult  to  trace.  ^^^^  incidence 
If  the  tax  were  well  and  universally^  as-  on  personal 
sessed  upon  all  such  capital,  it  could  not,  property. 
regularly,  be  shifted  from  the  owner  at  all.  There 
would  then  be  no  free  field  for  this  capital  to  invade. 
But  when  the  tax  is  evaded  by  a  considerable  pro- 
portion of  the  capital,  then  the  tax  can  be  shifted  to 
the  borrower  and  will  be  so  in  the  main.i 

1  For  the  rest  of  this  intricate  subject  the  student  is  referred  to 
the  larger  treatises. 


344  INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

It  will  be  seen  even  from  this  brief  statement  ol 
the  facts  of  shifting  concerning  the  general  property 
tax  that  the  incidence  is  different  from  the  intended 
incidence  wherever  that  tax  fails  of  forming  a  com- 
plete system. 

Sec.  7.  The  incidence  of  a  land  tax  like  the  Eng- 
lish differs  somewhat  from  that  of  the  land  tax  as 
part  of  the  general  property  tax,  inas- 

The  incidence 

of  as-pedal  much  as  it  stands  entirely  apart  from  the 
land  tax.  system.     Still  there  are  some  points  in 

common.  Both  these  taxes  may  be  capitalised. 
That  is,  the  taxed  property  will  sell  for  less  than 
it  would  bring  untaxed  by  the  amount  of  the  capital 
sum  which,  if  put  at  interest,  would  yield  the  amount 
of  the  tax.  In  the  case  of  the  general  property  tax, 
which  really  falls  upon  well-nigh  all  land  of  any 
value  whatever,  the  tax,  as  we  have  seen,  falls  most 
heavily  upon  the  producer  of  agricultural  commodi- 
ties. But  the  English  land  tax  has  been  capitalised 
and  was  paid  for  all  succeeding  owners  by  tlie  owner 
at  the  time  of  its  assessment,  since  it  did  not  affect 
all  lands  and  has  become  a  fixed  charge  upon  the 
property.  The  same  is  generally  true  of  all  taxes 
upon  land  which  are  in  addition  to  a  regular  i^j^stem 
of  taxes,  a  part  of  which  covers  the  revenue  from 
land.  The  same  may  be  said  of  a  special  building 
tax.i 

Special  taxes  upon  certain  forms  of  fixed  capital, 
especially  when  they  stand  beside  a  general  system 
1  See  Seligman,  p.  117. 


CHAP.  X  THE  INCIDENCE   OF  TAXATION  345 

which  is  fairly  universal,  may  be  capitalised  in  the 
same  way.     The  incidence  of   taxes  on    ,    ., 

"^  Incidence  of 

profits  is  determined  by  the  control  which  special  taxes 
the  recipient  of  profits  has  over  the  profits.  ^^  capi^z. 
If  the  control  is  so  great  that  he  can  virtually  raise 
them  at  will,  then  he  can  shift  the  burden.  But,  in- 
asmuch as  it  is  generally  true,  that  he  is  taking  all 
that  he  can  whether  he  be  taxed  or  not,  it  is  clear 
that  he  cannot  as  a  rule  shift  them.  Generally 
I  speaking,  then,  taxes  upon  profits  are  not  shifted. 
A  tax  on  successions,  also,  cannot  in  any  conceivable 
way  be  shifted. 

Poll  or  capitation  taxes  cannot  be  shifted  at  all. 
The  only  conceivable  case  in  which  they  might  be 
shifted  is  when  levied  upon  a  wage-earner  g^^^^^  ^j- 
at  the  point  of  starvation.  The  same  is  poll  taxes  and 
true  of  a  tax  on  the  lowest  wages.  The  '^"^^^ 
burden  would  mean  higher  wages  in  order  for  the  la- 
bourer to  live  and  meet  the  tax.  But  when  the  wage- 
earner  is  of  a  higher  class,  it  is  to  be  presumed  that 
he  cannot  shift  his  tax  at  all,  for  that  presupposes  that 
he  can  control  his  wages  sufiiciently  to  raise  them. 
If  that  were  the  case,  we  may  safely  assume  that  he 
would  raise  them  whether  the  tax  were  imposed  or 
not.     He  cannot  therefore  shift  them  at  all. 

A  tax  upon  income  cannot  be  shifted  if  the  assess- 
ment is  general  and  uniform.  But  as  a  matter  of 
fact  no  such  tax  is  general  or  uniform,  and  it  will  be 
shifted  or  not  according  as  it  splits  up  into  other 
taxes  upon  rent,  interest,  wages,  etc. 


346  INTRODUCTION  TO  PUBLIC  FINANCE    part  ii 

In  conclusion  :  the  intention  of  the  lawgiver  as 
to  the  incidence  of  taxation  will  be  fully  realised 
only,  (1)  when  the  system  is  theoretically  perfect, 
and  (2)  when  the  execution  of  the  law  is  perfect. 
The  worst  cases  of  shifting  arise  when  serious  gaps 
are  left  in  the  tax  system,  or  when  the  administra- 
tion of  the  system  is  so  lax  in  parts  as  to  result  in 
a  crippling  of  the  whole.  Shifting  always  acts  to 
intensify  existing  inequalities.  The  problems  of 
incidence  are  among  the  most  important  of  our  sub- 
ject. The  lawmaker  may  with  the  best  of  inten- 
tions work  the  greatest  imaginable  injury  ;  and  the 
necessity  for  a  pareful  study  of  the  probable  effects 
of  each  new  tax  cannot  be  overestimated. 


I! 


CHAPTER  XI 

FEES   AND   INDUSTRIAL   EARNINGS  * 

Section  1.  There  is  the  closest  sort  of  connection 
between  fees  and  the  industrial  and  commercial 
earnings  of  the  State.  In  the  case  of  The  connec- 
the  sale  of  goods  or  services  by  a  State  '*<^^  between 
the  private  persons  pay  the  price  of  the  dustriai  earrv 
wealth  which  they  obtain.  The  price  is  ^'^S'^- 
fixed  by  economic  conditions.  It  cannot  exceed  a 
certain  sum,  for  if  it  does,  the  citizen  will  not  buy. 
But  in  most  cases  considerations  of  a  public  charac- 
ter induce  the  State  to  enter  upon  the  industry  or 
commercial  enterprise,  and  these  very  considerations 
are  inducements  to  a  lowering  of  the  charges.  As 
the  public  element  comes  to  be  more  clearly  recog- 
nised, a  part  of  the  economic  forces  fail  to  act.  The 
State  sacrifices  part  or  all  of  the  gain,  but  makes 
no  loss.  As  the  public  element  presses  still  more  to 
the  front,  the  State  pays,  at  the  general  cost,  a  part 
of  the  expense,  and  charges  the  particular  persons 
specially  benefited  merely  a  fee  for  the  service. 
Many  modern  public  institutions  have  gone  through 
a  process  of  development  from  one  stage  to  the  other, 
and  the  different  stages  are  found  contemporaneously 
1  For  definitions  and  classification,  see  Chap.  II. 

an 


348  INTRODUCTION  TO  PUBLIC  FINANCE    part  ll 

in  different  countries.  But  while  this  is  the  order  of 
progression  in  new  functions,  it  is  not  the  historical 
order  of  the  rise  of  these  two  forms  of  payment  for 
public  services.     P'ees  are  the  older  of  the  two. 

Fees  are  not  to  be  found  in  the  ancient  civilisa- 
tions, because  of  the  intimate  relation  between  the 
Fees  and  the     individual  and  the    State.     Only    when 

comciousness  ^^^^^  .^  ^  distinct  COUSciouSnCSS  of 
of  "  Tpvbhc 

life.  "  public "  functions    can   we   have   fees. 

Payments  in  the  middle  ages  for  the  services  of  the 
courts,  of  the  church,  of  the  schools,  etc.,  were  mainly 
of  the  nature  of  private  remuneration.  As  soon, 
however,  as  any  function  comes  to  be  recognised  as 
public  in  character,  fees  arise.  At  first  contributions 
are  more  or  leSs  freely  and  willingly  rendered  for  the 
use  of  markets,  roads,  bridges,  protection,  and  the 
like.  Frequently  there  is  an  arbitrary  assumption 
made  that  a  special  benefit  is  conferred  and  a  fee  is 
charged.  As  the  State  emerges  from  feudalism,  the 
growth  of  public  consciousness  is  marked  by  a  rapid 
multiplication  of  these  fees,  which  form  a  system  of 
public  revenues  without  taxes.  After  that  the  line 
of  development  is  in  the  direction  of  the  curtailment 
of  the  fee  system  and  the  growth  of  the  tax  system. 
Fees  mark  the  transition  stage  in  the  division  of 
labour  in  the  public  service.  There  is  a  growth  of 
the  conception  of  common  benefits  as  distinct  from 
special  private  benefits,  and  a  corresponding  removal 
of  functions  from  one  to  the  other  category.  At  the 
same  time  new  functions  arise  which  are  supported 


CHAP.  XI      FEES  AND  INDUSTRIAL  EARNINGS  849 

by  fees,  until  finally  the  recognition  of  public  in- 
terest outweighs  that  of  the  individual  interest. 
Some  fees,  however,'  become  fixed  in  Fees  emerge 
character  and  are  not  subject  to  these  *^^^  taxes. 
transforming  tendencies  ;  but  the  public  interest  is 
recognised  in  this  case  by  limiting  the  fees  to  a  very 
small  part  of  the  total  cost.  Thus  many  court  fees 
are  retained,  but  the  larger  part  of  the  rapidly  grow- 
ing expenditure  for  the  support  of  justice  is  now 
met  from  taxes.  Those  functions,  in  connection 
with  which  there  are  fees,  are  regarded  as  conferring 
a  divided  benefit.  The  individual  pays  for  what 
he  receives,  the  State  for  what  the  public  gains 
thereby. 

Sec.  2.  The  extension  of  the  fee  system  by  the 
courts  to  cover  a  very  large  part  of  the  cost  of  the 
judicial  system,  even  to  such  a  degree  as  judicial  and 
to  make  litigation  impossible  to  all  but  i^gaifees. 
the  rich,  was  a  transition  stage  in  the  develop- 
ment from  the  middle  ages  to  the  present.  No- 
where was  the  fee  system  for  court  costs  more  abused 
than  in  England.  Later  practice,  while  placing 
more  of  the  burden  on  the  general  treasury,  has  re- 
tained an  extensive  tariff  of  such  "costs."  More- 
over, in  not  a  few  instances,  the  assessment  of  the 
" costs"  upon  the  party  responsible  for  the  litigation, 
as  shown  by  the  fact  that  he  loses  his  suit,  makes 
these  fees  approach  in  character  punitive  fines. 
This  is  the  characteristic  of  American  practice. 
In   many  cases  the  special  benefit  conferred  is  not 


350  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

very  clear,  but  is  arbitrarily  assumed  to  exist  and  the 
fee  levied  as  though  it  were  for  such  benefit. 

Since   the  middle  of   the   seventeenth  century,  a 
large  part  of  many  of  the  legal  fees  have  been  col- 
lected by  means  of  stamps  or   stamped 

The  coUectton  -^ 

of  fees  by  paper,  the  latter  being  necessary  to  le- 
stamps.  galise  the  transaction;   the  officer  who 

furnished  or  cancelled  the  stamp  being  supposed 
to  investigate  and  vouch  for  the  propriety  of 
the  transaction.  A  notary's  fee  in  most  of  the 
American  commonwealths  is  of  this  character,  the  fee 
being  receipted  for  by  a  stamp  embossed  upon  the 
paper.  Similar  fees  or  taxes  on  acts  and  transfers 
are  very  common  in  France.  Other  such  fees  are 
collected  in  the  form  of  the  sale  of  a  license  to  per- 
form certain  acts  which  would  not  be  legal  without 
such  a  permit ;  and  then  there  is  a  charge  for  record- 
ing the  act  after  it  has  been  performed  in  accord 
with  the  permit.  Of  this  character  are  the  fees  for 
marriage  licenses  and  recording  of  marriages.  The 
act  itself  is,  also,  often  subject  to  the  payment  of  a 
tax.  The  general  character  of  the  legal  fee  is  seen 
from  the  following  list:  fees  for  passports  and  similar 
papers  of  identification,  fees  for  recording  and 
legally  recognising  births,  deaths,  marriages,  and 
divorces,  changes  of  residence  or  legal  standing,  for 
papers  in  evidence  of  honours,  degrees,  orders,  titles, 
offices,  etc.,  for  patent  rights  and  copyrights,  for 
consular  services  in  vouching  for  invoices,  etc. 

Sec.  3.    Many  of  the  acts  of  the  various  adminis- 


CHAP.  XI      FEES  AND  INDUSTRIAL  EARNINGS  351 

trative  departments  are  of  such  a  character  as  some- 
times to  confer  a  special  benefit  upon  individuals 
for  which  a  fee  is  charged.  The  police  AdmvnUtra- 
may  render  extraordinary  services  as  in  i^'vejees. 
the  protection  of  property  on  special  occasions,  in 
the  control  of  masses  of  people,  preventing  intrusion, 
etc.  Examples  of  these  special  services  are  very 
frequent.  The  same  is  true  of  the  special  services 
of  detectives  for  private  persons. 

Fees  for  public  education  are  gradually  falling 
into  disuse.  They  were  originally  charged  for  all 
grades  of  instruction  from  the  lowest  up  Educational 
to  the  university.  The  importance  of  f^^^- 
primary  education  to  the  general  welfare  of  the 
people  and  to  the  prosperity  of  the  State,  when 
governed  by  popular  franchise,  led  to  the  abolition 
of  fees  for  that  grade  of  instruction  at  a  very  early 
date.  In  England,  owing  to  the  prevalence  of  an 
extreme  laissez-faire  view  upon  this  subject,  fees 
for  education  were  continued  longer  than  in  most 
countries,  having  only  very  recently  been  entirely 
abolished.  In  the  higher  grades,  wherever  such 
were  in  charge  of  the  State,  fees  were  retained 
much  longer  than  elsewhere.  The  great  univer- 
sities of  the  American  commonwealths  have  set 
the  example  of  free  tuition  for  their  thousands 
of  students,  although  they  still  retain  a  number  of 
small  fees  for  registration,  diplomas,  and  certain 
incidental  expenses  connected  with  laboratory  and 
similar   instruction.       European   State   universities 


352  INTRODUCTION   TO  PUBLIC  FINANCE    part  n 

still  generally  retain  the  fee  system  for  most  of  the 
lecture  courses.  Schools  intermediate  between  those 
giving  rudimentary  education  and  the  universities 
are  generally  managed  without  fees,  like  the  lower 
grades.  Educational  functions  of  governments  seem 
to  have  been  going  through  the  same  transformation 
which  roads  have  gone  through.  Already  the  larger 
part  of  the  cost  is  met  from  general  taxes  and  but  a 
small  part  from  fees.  Finally  the  remaining  fees 
will  fall  away. 

In  those  countries  in  which  the  State  supports  the 

churches,  or   churches   of   a   certain   denomination, 

there  are  a   number   of   fees   connected 

Church  fees.         ^  .  -,  ^  i  p  ^  t- 

therewith,  such  as  those  for  the  use  oi 
churches «and  churchyards,  for  baptisms,  christenings, 
marriages,  burials,  confirmations,  and  communion. 
The  means  for  meeting  the  rest  of  the  expenses 
are  drawn  from  two  sources.  A  part  is  sometimes 
taken  from  the  general  taxes  or  from  special  taxes 
collected  for  the  purpose,  and  the  remainder  from 
voluntary  contributions  by  the  attendants,  or  from 
the  sale  of  sittings  and  the  like.  This  is  the  only 
important  remnant  of  voluntary  contributions  in  any 
part  of  the  financial  system.  In  most  instances  the 
voluntary  contributions  are  for  special  purposes, 
organised  charity,  missions,  etc.,  which  are,  perhaps, 
not  properly  considered  of  a  public  character. 

The  fees  rendered  by  individuals  in  connection  with 
their  industrial  and  commercial  enterprises  are  very 
numerous.     The  oldest  and  simplest  are  charges  for 


CHAP.  XI      FEES  AND  INDUSTRIAL  EARNINGS  853 

the  use  of  market-places,  later  for  the  use  of  public 
exchanges,  etc.;  then  come  the  charges  The  fees  for 
for  statistics  collected  by  public  officers,  ^^talTto  ri  ^ 
and  the  charges  for  the  use  of  bridges,  ^«'e  industry. 
roads,  quays,  etc.  The  modern  substitutes  for  roads 
—  railroads,  canals,  street  railroads,  omnibuses  —  are 
already  passing  from  private  into  public  hands,  and 
the  period  of  transition  is  marked  by  a  more  and 
more  extended  use  of  the  fee  system.  Other  means 
of  communication — the  post,  the  telegraph,  and  the 
telephone  —  are  of  the  same  character.  Fees  for 
coinage  are  also  for  services  to  commerce.  They  are  in 
use  by  every  country  in  some  form  or  other.  In  the 
United  States  the  charge  for  coinage  was  one-fifth  of 
one  per  cent.  England  allows  the  Bank  of  England 
to  make  a  similar  charge  when  advancing  notes  upon 
bullion,  and  to  set  the  price  in  notes  for  gold  coin 
and  gold  bars.  These  fees  must  not  be  confused 
with  the  charges  known  as  seigniorage,  the  latter 
being  a  tax  upon  commerce. 

Sec.  4.  One  of  the  most  important  classes  of  fees 
is  formed  by  special  assessments.  They  are  for  some 
benefit  to  real  property.  A  special  assess-  special  assess- 
ment is  a  fee  paid  to  cover  the  cost,  less  "*«^^s- 
that  of  supervision  by  a  salaried  public  officer,  of  a 
specified  improvement  to  property  undertaken  in  the 
public  interest.  In  his  excellent  study  on  this 
subject  Mr.  Rosewater  i  tries  to  establish  a  difference 
between  fees  and  special  assessments.  He  admits 
1  Columbia  College  Studies,  Vol.  II.,  3. 
2a 


354  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

the  similarity,  but  points  out  that  special  assessments 
Special  assess-  are  restricted  in  purpose  and  in  place, 
merds  are  fees,  ^ccq  apportioned  among  the  members  of  a 
class,  are  assessed  once  and  for  all  and  for  benefits  to 
real  property  only.  Professor  Seligman  makes  the 
same  distinction.  But  it  is  certainly  not  defensible 
on  purely  theoretical  grounds,  for  the  differences  are 
not  essential,  but  accidental.  We  might  as  well  set 
up  a  separate  class  of  taxes  on  marriages,  for  they 
are  restricted  in  purpose,  are  assessed  upon  members 
of  a  class,  once  and  for  all,  and  are  for  benefits  to 
the  family  only.  Like  all  other  fees,  special  assess- 
ments are  imposed  by  the  taxing  power,  cover  both 
public  and  private  benefits,  and  do  not  exceed  the 
costs. 

The  simplest  case  of  a  special  assessment  is  when 
a  street  is  to  be  built,  with  necessary  sewers  and 
Example  of  a  watcr-pipes.  The  costs  of  this  have  to 
special  assess-  be  met.  There  is  a  public  interest  in 
the  street  as  a  thoroughfare.  Private 
enterprise  cannot  be  trusted  to  properly  protect  the 
public  interest.  The  city,  therefore,  must  step  in.  It 
could  pay  the  cost  from  general  taxes  or  from  tolls, 
of  both  of  which  the  specially  benefited  persons  would 
pay  their  share.  But  in  that  case,  temporarily  at 
least,  the  abutting  landowners  would  reap  an  un- 
earned harvest  at  the  expense  of  their  fellow-citizens. 
It  appeals  to  our  sense  of  justice  that  they  should 
pay  for  it.  They  can  always  afford  to  do  so,  as  they 
gain  by  the  improvement.     This  system  has  received 


CHAP.  XI      FEES  AND  INDUSTRIAL  EARNINGS  355 

large  currency  in  the  United  States,  and  has,  accord- 
ing to  Mr.  Rosewater's  extensive  investigations,  given 
general  satisfaction. 

Another  method  has  been  used  to  some  extent  in 
England.  It  is  similar  to  that  used  by  private 
speculators  in  America,  when  they  open  up  a  new 
city,  or  suburb.  The  city  condemns  and  buys  up 
enough  of  the  land  to  be  improved  to  furnish,  when 
sold  after  the  improvements,  the  funds  needed. 
This  method  has  a  very  limited  application. 

Special  assessments  are  not  frequent  in  Europe,  but 
do  occur.  Mr.  Rosewater  finds  them  in  varied  form  in 
France  and  Germany  ;  and  they  are  pro-  s^,,^^,,,,,,. 
posed  in  England  under  the  name  of  the  ments  not  used 
"betterment"  tax.  In  the  last-named  ^'^^^'-^p^- 
country  they  were  early  applied  to  "walls,  ditches, 
gutters,  sewers,  bridges,  etc.,  damaged  by  the  sea." 
But  not  until  lately  has  the  principle  of  measuring 
the  tax  by  the  particular  benefit  been  applied  or  pro- 
posed, and  even  now  the  principle  is  not  quite  clear. 
In  England  the  assessment  is  to  cover  the  cost  of 
the  removal  of  injury  rather  than  the  cost  of  con- 
ferring a  benefit.  In  England  the  cost  of  improve- 
ments is  assessed  in  general  taxes  from  which  certain 
unbenefited  districts  are  exempt.  Strictly  speaking, 
the  principle  is  not  regularly  applied  in  England  at 
all. 

In  the  United  States  this  fee  finds  almost  uni- 
versal acceptance.  It  is,  indeed,  remarkably  well 
suited  to  the  economic  conditions  of  a  new  country, 


356  INTRODUCTION  TO  PUBLIC  FINANCE    part  il 

and  renders  rapid  improvement  possible.     In  some 
parts  of  the  country  there  are  harmful 

Good  results        ^  "^  . 

in  the  United  results  that  arise  from  the  desire  to 
states.  gj^g  property  owners   full  control  over 

the  improvements  for  which  such  assessments  are  to 
be  made.  Thus,  in  some  commonwealths,  street  im- 
provements are  only  made  with  the  consent  of  the 
owners  of  a  majority  of  the  property  concerned. 
The  result  is  tliat  streets  are  opened  irregularly,  and 
some  of  the  main  streets  are  untouched,  while  side 
streets  are  improved.  But  this  is  an  evil  of  expen- 
diture rather  than  necessarily  connected  with  this 
mode  of  collecting  the  revenue.  The  abuses  of  spe- 
cial assessments  are  few,  and,  on  the  whole,  it  is  a 
part  of  the  tax  system  of  which  America  can  be  justly 
proud.  Professor  Bastable's  criticism  (p.  377)  of 
these  fees  rests  upon  a  misconception  of  the  method 
of  handling  the  assessments.  They  are  assessed 
according  to  the  cost  of  the  improvements ;  the 
special  benefit  is  the  justification  of  the  contribu- 
tion, not  its  measure.  There  is  seldom  any  difficulty 
in  apportioning  the  cost  fairly.  No  charge  need  be 
made  for  any  additional  benefit  beyond  the  cost,  and 
the  contributor  has,  usually,  a  voice  in  deciding 
whether  the  proposed  improvement  shall  be  under- 
taken or  not. 

In  view  of  the  fact  that  the  prevailing  theory 
of  taxation  in  this  country  is  that  which  we  have 
designated  as  the  benefit  theory,  it  is  natural  that 
Americans  should  have  been  the  oneis  to  have  made 


CHAP.  XI      FEES  AND   INDUSTRIAL  EARNINGS  357 

the  application  of  the  theory  in  this  particular  case. 
The  special  assessment  is  applied  in  iust   „ 

_       ^  *•  •'  opecial  assess- 

those  cases  in  which  it  is  easiest  to  ments  and  the 
measure  the  special  benefit.  And  al-  ^«^^^«  <^««^2/- 
though  the  principle  cannot  be  given  a  wider  appli- 
cation with  any  degree  of  satisfaction,  it  does,  in 
this  instance,  comply  with  the  demands  of  justice 
and  equality.  It  would,  moreover,  be  rather  hard  to 
find  under  the  faculty  theory  any  better  justification. 
Sec.  5.  The  post  was  included  above  among  those 
functions  for  which  fees  were  charged.  Whether 
that  be  quite  correct  or  not,  depends  upon 

.  ,  .    ,        1  ,  .       Postal/ees. 

the  way  in  which  the  postal  system  is 
run.  If  it  is  run  so  as  to  yield  the  largest  possible 
revenue  over  and  above  expenses,  it  is  of  exactly  the 
same  character  as  any  other  industrial  enterprise  upon 
which  the  State  enters.  The  State  sells  postal  ser- 
vices for  the  highest  price  it  can  get,  or  rather,  for 
the  largest  net  return.  Its  profits,  the  post-office 
being  a  monopoly,  are  regulated  by  the  principle  of 
charging  wliat  the  traffic  will  bear.  But  no  post- 
office  is  run  on  this  principle.  The  importance  of 
the  public  service  rendered  has  led  to  the  recogni- 
tion of  a  large  element  of  common  benefit.  This 
recognition  has  not  resulted  in  the  entire  abandon- 
ment of  charges  for  the  service  except  in  a  few  in- 
stances; for  example,  the  free  carriage  of  news- 
papers in  the  county  in  which  they  are  published. 
But  it  has  led  to  the  attempt  to  run  the  service  in 
such  a  way  that  expenses  shall  be  met,  and  only  a 


358  INTRODUCTION  TO  PUBLIC   FINANCE    part  ii 

small  surplus,  if  any,  shall  accrue  to  the  benefit  of  the 
treasury.  Whenever  the  surplus  tends  to  grow,  the 
rates  are  lowered  or  the  service  improved.  Of  all 
the  powers.  Great  Britain  is  the  sole  exception  to 
this  rule,  about  one-third  of  her  postal  receipts  be- 
ing profits.  (1895,  receipts  .£10,760,000,  expenses 
£6,869,000.  But  the  allied  telegraph  service  ran 
behind;  receipts  £2,580,000,  expenses  £2,674,000.) 
The  postal  rates  in  Great  Britain  are  as  low  as  in 
other  countries,  but  the  surplus  is  accounted  for  by 
the  extremely  small  size  of  the  territory  covered 
by  the  land  service,  the  concentration  of  population, 
and  the  cheapness  of  water  transportation,  all  of 
which  makes  it  particularly  easy  to  do  a  large  and 
profitable  business  at  low  rates. 

There  are  some  writers  who  regard  any  surplus 
acquired  in  this  way  as  practically  the  result  of  tax- 

PoBtaisurvius  ^^^^^^  ^^^^  ^^^^s  any  charge  for  the  pub- 
not  the  result  lic  scrvice,  abovc  the  cost  thereof,  as  a 
special  tax.  This  classification  presup- 
poses that  the  service  is,  by  nature,  of  a  public  char- 
acter, an  assumption  contrary  to  the  fact,  for  no 
function  except  that  of  governing  itself,  in  the  nar- 
rowest possible  sense,  is  hi/  nature  of  a  public  charac- 
ter, nor,  on  the  other  hand,  bi/  nature  of  a  private 
character.  On  this  consideration,  therefore,  it  is 
better  to  class  these  gains,  not  as  taxes,  but  as  the 
earnings  of  a  public  industry. 

Sec.  6.     In  modern  times  public  industries  can  be 
quite  as  properly  considered  under  the  head  of  ex- 


CHAP.  XI      FEES  AND   INDUSTRIAL   EARNINGS  359 

penditure  as  under  that  of  revenue.  Historically, 
State  industries,  like  puSlic  or  princely  domains, 
lands,  forests,  and.  mines,  were  mainly  PuUicmdus- 
sources  of  revenue.  But  a  railroad  is  tries  not  pri- 
placed  in  the  hands  of  the  State  primarily  ^ake  o/reve-^ 
because  of  the  public  interests  involved,  ^^^• 
and  the  expenditure  for  that  purpose  is  more  signifi- 
cant than  the  moderate  surpluses  that  accrue,  in 
some  cases,  to  the  government.  For  that  reason  we 
called  attention  to  these  activities  under  the  head  of 
expenditure.  We  have  now  to  consider  them  as 
productive  of  so  much  total  wealth,  a  part  of  which 
is  immediately  spent  for  the  purpose  which  led  the 
State  into  this  activity,  and  a  part,  generally  a  very 
small  part,  saved  to  assist  in  the  accomplishment  of 
other  purposes. 

The  oldest  form  of  public  property  is  land.  The 
public  land  originally  embraced  all  the  territory  of 
the  State.     Gradually  parts  .of  it    were 

Public  lands. 

alienated  to  a  private  purpose  subject 
only  to  the  law  of  eminent  domain ;  but  considerable 
portions  even  to  the  present  day  belong  to  the  State, 
or,  what  is  the  same  thing,  to  the  local  governments. 
In  the  monarchies  of  Europe  such  lands  were  once 
considered  the  property  of  the  prince.  These  lands 
were  the  main  reliance  for  public  revenues  in  the 
feudal  State.  As  the  people  gained  a  voice  in  the 
government,  they  laid  claim  to  these  sources  of  rev- 
enue for  public  purposes.  From  that  time  on,  the 
public  domain   diminished  both  absolutely,  by  sale 


360         INTRODUCTION  TO  PUBLIC  FINANCE    part  n 

or  alienation,  and  relatively  as  the  wealth  of  the 
people  swelled.  Some  countries  adopted  a  very 
conservative  policy  in  this  respect,  and  retained 
their  domains  in  land  and  forests,  while  others 
adopted  the  plan  of  steadily  disposing  of  them. 
German  states  are  examples  of  the  former  policy, 
while  England,  France,  and  the  United  States  have 
been  examples  of  the  latter.  England  receives  only 
£520,000  annually  of  "Woods,  Forests,  and  Land 
Revenues  of  the  crown."  In  the  United  States  it 
was  the  possession  of  vast  tracts  of  land  by  the 
federal  government,  acquired  by  gift  from  the  com- 
monwealths, and  by  purchase,  which  gave  that  gov- 
ernment an  independent  territory  over  which  its 
control  was  absolute,  and  formed  one  of  its  strongest 
supports,  contributing  most  materially  to  the  growth 
of  federal  influence.  But  the  public  lands  have  not 
been  a  source  of  revenue  to  the  government.  The 
money  received  from  settlers  has  amounted  to  little 
more  than  fees  for  the  registration  of  titles,  and 
except  for  the  ten  years  from  1830  to  1840  the  lands 
have  not  yielded  a  clear  revenue.  The  extensive 
surveys  which  the  government  carried  out  have  been 
a  large  expense  attributable  to  this  source.  Under 
constitutional  government  there  is  little  danger  of 
the  failure  of  taxation  as  a  permanent  and  regular 
source  of  revenue.  So  that  public  lands  are  not  re- 
garded as  necessary  for  the  integrity  of  the  govern- 
ment. The  retention  of  public  lands  in  Germany 
and  Austria  is  not  explainable  by  any  danger  of  the 


CHAP.  XI      FEES  AND  INDUSTRIAL   EARNINGS  361 

failure  of  taxation,  but  by  the  greater  tenacity  of 
the  older  communistic  idea.  Democrat-  No  reason  for 
ically  governed  cities  and  towns  clinp;  to    ^^^  retention 

^-     .     ,        ,  ,  -  ,  °  of  public  lands 

their  lands  as  strongly  as  the  royal  gov-  to-day. 
ernments.  Prussia's  public  lands  and  forests  yield 
about  50,000,000  marks  annually  after  all  expenses 
have  been  met.  Cities  and  towns  get  as  much  more, 
and  in  many  cases  supply  burgher  families  with 
wood  without  charge.  In  Russia  the  process  of 
emancipating  the  serfs  has  changed  the  receipts  from 
public  lands  into  taxes,  and  left  practically  little  rev- 
enue of  the  older  character.  In  spite  of  the  absence 
of  constitutional  government,  Russia  has  gone  faster 
in  proportion  to  wealth  and  revenues,  in  the  aboli 
tion  of  public  domains  than  many  German  states, 
Russia's  gross  receipts  from  domains  are  about 
$12,500,000,  while  Prussia's  are  nearly  $22,000,000. 
The  alienation  of  public  lands  in  Russia  is  recent, 
and  it  has  progressed  as  that  country  advanced  in 
civilisation. 

Except  when  in  charge  of  a  highly  trained  body 
of  expert  officials,  as  in  Germany,  the  public  lands 
do  not  form  a  satisfactory  source  of  rev-  Public  control 
enue.     They  are  not  as  a   rule   as  well  ^JJ^^^^^^ " 

•^  public  neces- 

managed  as  similar  lands  in  private  sity. 
hands.  Forests  form  an  important  exception  to  this 
statement.  A  private  owner  cannot  afford  to  wait 
long  enough  for  economical  use  of  timber  land. 
The  destruction  of  forests  at  private  hands  is  a  seri- 
ous danger.     Only  a  permanent,  long-lived  institu- 


862         INTRODUCTION   TO  PUBLIC  FINANCE    part  n 

tion  like  the  government  can  take  proper  care  ot 
forests. 

Closely  allied  with  the  public  ownership  of  lands 
and  forests  is  the  public  ownership  of  mines.  This  is 
Ownership  o^c  of  the  oldest  State  industries,  which 
of  mines.  jg  of  late  falling  into  disuse.  The  work- 
ing of  mines  by  the  government  is  being  replaced  in 
Europe  by  a  system  which  allows  of  private  opera- 
tion, but  guarantees  the  public  interest  by  the  collec- 
tion of  royalties,  or  mining  taxes.  In  the  older 
countries,  where  the  idea  of  public  territorial  owner- 
ship is  stronger,  the  old  system  still  prevails,  and, 
even  where  it  is  partially  surrendered,  the  revenues 
derived  from  royalties  and  taxes  are  proportionately 
large.  But  in  the  new  countries  of  the  American 
continent  and  Australia  private  ownership  generally 
prevails,  and  no  more  revenue  is  derived  from  this 
source  than  from  any  other  taxed  industry.  The 
feudal  idea  of  territorial  ownership,  a  remnant  of 
which  still  survives  in  those  countries  of  Europe 
which  retain  their  interests  in  the  mines,  is  very  dif- 
ferent from  that  of  private  ownership  in  fee  simple  as 
in  America.  This  accounts  for  the  difference  in  the 
revenues  from  this  source. 

Sec.  7.  But  while  the  modern  State  has  surren- 
dered the  extractive  industries,  a  great  many  others 
Otfier  indtis'  havc  been  undertaken,  not  so  much  as 
tries.  sources  of  revenue  as  because  of  the  im- 

portance of  the  public  interests  involved.  Before  the 
nineteenth  century  the  mqst  striking  instances  are  of 


CHAP.  XI      FEES  AND  INDUSTRIAL  EARNINGS  363 

the  production  of  some  commodity  needed  for  the 
public  service  or  of  articles  of  an  artistic  and  costly 
character.  Examples  of  the  latter  are  the  Gobelin 
tapestries  and  the  Sevres  ware.  In  supplying  arms, 
forts,  vessels,  public  buildings,  and  the  like  there  is  no 
uniformity  of  practice  among  the  nations.  In  only  a 
few  cases  is  the  method  regularly  that  of  government 
production.  There  is  a  similar  absence  of  uniformity 
in  practice  in  regard  to  all  those  industries  which  in- 
volve large  public  interests  for  the  conservation  of 
which  there  is  under  private  management  no  good 
guarantee.  In  some  cases,  as  the  water-supply,  there 
is  a  general  tendency  in  the  direction  of  public  own- 
ership. Whenever,  as  in  this  case,  a  public  interest 
is  absolutely  paramount  to  every  other  consideration, 
there  is  little  attempt  to  make  the  industry  a  source 
of  revenue  beyond  what  is  necessary  to  maintain  the 
service.  These  industries,  therefore,  tend  rapidly  to 
be  supported  by  fees  or  taxes.  Inasmuch  as  it  is 
generally  the  importance  of  the  public  interest  that 
led  to  the  assumption  of  the  industry  by  the  govern- 
ment, this  tendency  is  universal.  Roads,  canals,  the 
water-supply,  the  post-office,  telegraph,  telephone, 
and  the  railroads  all  pass  more  or  less  rapidly  through 
these  stages  according  to  the  importance  ascribed  to 
the  public  interest  in  them.  As  already  seen,  the 
post-office  is  now  primarily  supported  by  fees.  The 
funds  for  the  support  of  waterworks  are  generally 
collected  from  the  users,  as  fees,  or  from  certain 
classes  of   persons  as   special   taxes,  but   seldom  as 


364  INTRODUCTION   TO  PUBLIC  FINANCE    part  ii 

prices  for  the  service.  The  experience  of  nations 
with  State-owned  railroads  is  too  recent  and  too  varied 
to  be  very  instructive.  States  have  been  led  into 
the  ownership  and  operation  of  railroads  :  first,  be- 
cause the  roads  needed  the  support  of  public  credit : 
second,  because  of  military  interests  ;  third,  because 
of  the  failure  of  private  companies  to  protect  public 
interests.  Railroads  have  more  often  been  a  source 
of  public  expenditure  than  of  public  revenue.  In 
Prussia  alone  have  the  financial  results  been  such  as 
to  add  materially  to  the  income  of  the  treasury. 
The  question  of  government  ownership  of  railroads 
is  one  involving  considerations  broader  than  merely 
fiscal  ones,  and  does  not  properly  belong  to  our  sub- 
ject. In  no  case  is  it  at  all  likely  that  merely  fiscal 
considerations  will  have  more  than  a  deterrent  effect 
upon  the  solution  of  the  problem  of  the  government's 
action  in  regard  to  the  management  of  the  railroads. 
While  the  industrial,  commercial,  or  other  eco- 
nomic functions  of  the  State  are  of  continually  grow- 
PrMicindua-    i^g  importance,  they  are  not  likely  to  be 

try  not  likely 

to  he  a  source  largely  a  source  of  net  revenue.  No- 
of  net  revenue,  where  do  wc  find  principles  that  would 
lead  us  to  anticipate  that  revenues  of  this  character 
will  ever  supply  the  place  of  taxes.  Indeed,  if  the 
usual  evolution  continues,  these  functions  may  be 
performed  by  the  State  without  a  special  charge 
upon  the  benefited  persons,  and,  while  the  liberties 
of  the  people  in  respect  to  the  enjoyment  of  these 
facilities  will  be   greater,  the  burden  thrown  upon 


^ 


CHAP.   XI      FEES  AND  INDUSTRIAL  EARNINGS  365 

general  taxation  will  be  equally  so.  If  a  city  now 
supplies  a  sewer  system  to  citizens  free  of  special 
charge  except  for  first  construction,  it  may  with  the 
same  logic  supply  water.  If  a  State  furnishes  roads 
at  common  cost,  it  may  certainly  so  far  modify  the 
management  of  railroads  as  to  apply  the  fee  system 
and  forego  the  collection  of  any  surplus,  though  in 
this  case,  as  in  that  of  the  post-office,  there  would 
seem  to  be  as  yet  no  sign  of  any  tendency  to  go 
beyond  the  fee  system. 


PART    III 

PUBLIC  INDEBTEDNESS 

CHAPTER   I 

THE   GROWTH   AND   NATURE   OF   PUBLIC   CREDIT 

Section  1.  The  national  governments  of  the  civ- 
ilised world  owed  in  1908-1909  more  than  thirty-six 
The  size  of  and  one-half  thousand  millions  of  dollars, 
public  debts,  q^.  geven  and  one-half  thousand  million 
pounds  sterling.  With  the  addition  of  the  debts 
owed  by  the  local  governments  this  sum  will  ex- 
ceed forty  thousand  millions  of  dollars,  or  eight 
thousand  million  pounds.  The  nearest  available 
figures  are:  — 

National  debt  of  all  countries,  1890  .         .  $27,524,976,915 
National  debt  of  all  countries,  1908   .         .      36,548,455,4891 

According    to    the    best    available    authorities    the 
national  indebtedness  of  the   world  increased  four- 

1  Bastable,  in  his  edition  of  1903,  says  that  the  total  of  national 
debts  can  hardly  have  been  less  than  £7,000,000,000  at  the  close 
of  the  nineteenth  century  (p.  626). 

366 


CHAP.  I  PUBLIC  INDEBTEDNESS  367 

fold  between  1848  and  1890,  and  by  1908  it  was 
fivefold. 

Years  Aggregate  debt  Increase  Percent 

of  increase 

1848  .  .  %  7,627,692,215 

1860  .  .     10,399,341,688  $2,771,649,473  36.34 

1870  .  .     17,117,640,428  6,718,298,740  64.60 

1880  .  .    27,421,037,643  10,303,397,215  60.19 

1890  .  .    27,524,976,915  103,939,272  .38 

1908  .  .     36,548,455,489  9,023,478,574  32.80 

[From  best  available  sources.] 

The  increase  of  national  indebtedness  between 
J  880  and  1890  was  comparatively  slight.  But  this 
was  partly  due  to  the  payment  of  a  large  part  of  the 
national  debt  of  the  United  States.  The  increase 
since  1890  is  largely  attributable  to  the  Boer  War 
in  England  and  to  the  Spanish-American  War. 
Other  countries  have  continued  the  process  of  debt- 
making —  although  less  rapidly,  owing  to  the  continu- 
ance of  peace.  The  above  figures  do  not  include 
pensions,  which  are  really  debts  in  the  form  of 
annuities. 1 

The  following  table  compiled  from  the  Statesman's 
Year  Book  for  1906  gives  the  details  of  the  population, 
indebtedness,  and  fer  capita  debt  on  the  account  of 
the  national  governments  only,  of  twenty-four  of  the 
most  important  nations. 

1  If  these  were  included  and  capitalised  at  ten  years'  purchase, 
which  would,  perhaps,  be  a  fair  average,  they  would  add  to  the 
debt  of  the  United  States  at  least  $1,600,000,000. 


868 


INTRODUCTION  TO  PUBLIC  FINANCE    part  in 


Reported  National  Debt  of  Specified  Nations  for  the 
Fiscal  Year,  1904-1905 


Pek 

COTTNTBY 

Population 

Total  Debt 

Capita 
Debt 

Austria 

26,150,710 

%    785,243,792 

130 

Hungary .     . 

19,254,560 

1,069,067,851 

56 

Austria-Hungar 

y 

45,405,270 

1,095,606,825 

24 

Belgium  .     . 

7,074,910 

606,762,617 

86 

Bulgaria  .     . 

3,744,280 

66,162,890 

18 

Denmark 

2,464,770 

65,269,644 

26 

France     ,     . 

38,961,950 

5,929,395,672 

152 

Germany .     . 

60,605,180 

823,290,138 

14 

Greece      ,     . 

2,433,800 

164,001,050 

67 

Italy    .     .     . 

33,476,120 

2,424,448,935 

72 

Netherlands 

5,509,660 

464,246,824 

84 

Norway    .     . 

2,240,100 

71,657,217 

32 

Portugal  .     . 

5,423,130 

855,114,614 

158 

Roumania     . 

6,400,000 

264,723,487 

41 

Russia      .     . 

129,309,300 

3,738,394,688 

29 

Servia       .     . 

2,676,990 

89,736,313 

34 

Spain  .     .     . 

18,618,100 

1,858,191,268 

100 

Sweden    .     .     , 

5,260,810 

103,803,418 

20 

Switzerland  .     . 

3,425,380 

19,798,382 

6 

Turkey     .     .     . 

24,028,900 

537,767,716 

22 

United  Kingdon 

a    . 

43,218,000 

3,877,318,133 

90 

United  States    . 

81,511,815 

989,866,772 

12 

China.     .     .     . 

407,253,000 

587,654,208 

1 

Japan 

46,732,200 

483,942,912 

10 

The  totals  for  the  British  Empire  are:  population 
325,540,000,  total  indebtedness  17,190,748,566 
(£1,440,000,000),  joer  mmYai22  (£4  lOs). 

While  the   absolute  amount  of   the  debt  has   in 


CHAP.  I  PUBLIC  INDEBTEDNESS  369 

creased,  the  burden  has  materially  decreased   since 
1880,  owing   to  the  increase  in  popula- 

,    ,  ^       ^  ^    ^  The  burden 

tion  and  wealth.  In  1880,  the  national  has  decreased 
indebtedness  of  countries  other  than  the  **^^^  ^'^'^^• 
United  States  amounted  to  ^535. 64  per  capita^  while 
in  1890  it  was  $32.90  per  capita.  During  the  same 
period  the  national  debt  of  the  United  States  was 
reduced  absolutely  by  over  a  billion  dollars,  and 
relatively  from  138.33  per  capita  to  il4.24  per  capita. 
The  per  capita  debt  for  the  world  at  large  on  the 
national  accounts  only  was  in  1909  about  126,  that 
of  the  United  States  in  the  same  year  about  |10. 
Of  course  statistics  of  this  sort  are  neither  perfectly 
accurate  nor  easy  to  interpret.  The  only  proper 
comparison  between  different  countries  would  be  that 
of  the  ratio  of  the  interest  charge  to  the  annual  in- 
come of  the  people.  But  the  annual  income  is  very 
difficult  to  ascertain,  and  the  errors  would,  probably, 
be  so  great  as  to  destroy  the  significance  of  the  result. 
But  the  foregoing  figures,  while  not  absolutely  correct, 
are  sufficiently  so  to  indicate  that  the  policy  of 
borrowing  has  become  a  most  vital  part  of  the  system 
of  public  finance.  The  cause  of  the  national  debts 
is  almost  exclusively  war  and  the  preparation  for 
war.  If  the  expenses  of  war  and  its  preparation  had 
been  excluded  from  their  finances  and  the  treasury 
relieved  of  the  subsequent  burden  of  interest,  civil- 
ised nations  would  have  been  easily  able  to  meet 
their  current  expenses.  In  England  the  annual 
public-debt  charges  for  interest  and  debt  payments 
2b 


370        INTRODUCTION  TO  PUBLIC  FINANCE    part  hi 

consume  nearly  one-fourth  of  the  annual  revenues 
from  every  source.  The  policy  pursued  by  England 
is  to  fix  a  permanent  debt  charge  against  the  annual 
revenues  and  to  use  all  that  can  be  saved  therefrom 
over  and  above  the  interest  charges  for  the  payment 
of  the  principal.  This  so-called  sinking  fund  system 
is  suspended  in  time  of  war.  The  funded  debt  of 
France,  the  largest  ever  contracted  by  any  country, 
imposes  an  interest  charge  of  about  1,250,000,000 
francs  upon  a  total  revenue  of  about  3,500,000,000 
francs.  If  we  include  certain  annuities  and  pensions, 
over  one-third  of  the  revenues  of  France  are  con- 
sumed in  this  way. 

Germany  is  the  only  country  of  importance  that 
does  not  rely  entirely  upon  the  possibility  of  borrow- 
ing money  in  case  of  war.  That  country  maintains 
a  special  cash  reserve  of  $30,000,000,  which  is  avail- 
able for  immediate  application  to  war  purposes,  should 
Germany's  it  be  needed.  Although  the  German  Em- 
cash  reserve,  ^[^.q  began  in  1871  without  debt,  it  had  in 
1908  a  debt  of  1,588,000,000  marks.  This  is  largely 
due  to  armament.  So  that,  although  Germany  holds 
a  cash  reserve  for  military  purposes,  it  is  practically 
a  borrowed  one,  and  she  is  making  her  preparation 
for  war  on  borrowed  money.  This  policy  does  not 
differ  essentially  from  that  of  other  countries.  In 
the  middle  ages,  however,  as  in  classical  times,  it 
was  the  practice  of  nations  to  accumulate  a  treasure 
for  war  purposes  in  advance,  by  collecting  more 
revenue  each  year  than   was  needed.      This  prac- 


CHAP.  I  PUBLIC  INDEBTEDNESS  37 J 

tice  is  now  obsolete  and  is  also  indefensible  as  too 
costly.^ 

Modern  nations,  then,  practise  a  method  of  deficit 
financiering.  They  make  provision  in  their  annual 
revenues  for  the  current,  regular,  or  oejicUfinan. 
"  ordinary  "  expenditures  only,  and  rely  ci^^ing. 
for  funds  at  other  times  upon  their  ability  to  borrow. 
What  then  constitutes  this  ability  to  borrow  upon 
which  so  much  reliance  is  placed  that  even  the  very 
existence  of  the  nation  is  allowed  to  depend  upon  it  ? 
Since  when,  and  how  is  it,  that  nations  have  been 
able  to  rely  so  absolutely  upon  public  credit  ?  The 
answer  to  both  these  questions  is  contained  in  the 
analysis  of  public  credit.^ 

Sec.  2.    Public  credit  is  only  one  form  of  general 
credit,  and   it   is   comparatively  easy  to  point  out 
wherein  the  former  differs  from  the  lat-  ^^^^.^  ^^^^.^ 
ter.     But  credit  in  itself  is  by  no  means  aformofgen- 
easy  to  define.     Scarcely  any  two  of  the 
able  writers  who  have  treated  the  subject  are  agreed 
as  to  its  most  important  features.     It  has,  moreover, 
as   a  term   in   common  use,  suffered  so  Difficult  to 
many  subtle  changes  in  meaning  in  the  define  credit. 
course  of  its  history  as  to  leave  its  modern  signifi- 

^  See  Bastable,  p.  667. 

2  The  first  edition  of  this  work  was  severely  criticised  for  con- 
taining the  analysis  of  public  credit  that  is  reembodied  in  this 
edition.  It  may  well  be  that  a  study  of  credit  is  more  appropriate 
to  a  work  on  economics  than  to  one  on  public  finance.  But  the 
iinance  minister  of  every  nation  is  necessarily  vitally  concerned 
about  the  credit  he  can  command,  and,  appropriate  or  not,  the  sub- 
jdct  is  of  vital  public  importance  in  a  fiscal  relation. 


372        INTRODUCTION  TO  PUBLIC  FINANCE    part  m 

cance  full  of  dangerous  variations.  The  ordinar}' 
business  man  uses  the  word  daily  to  convey  half  a 
dozen  or  more  different  ideas  without  recognising 
the  differences.  Scientific  writers  have  waged  long 
and  bitter  controversies  concerning  its  proper  defini- 
tion.^ Without  going  too  deeply  into  the  controversy, 
we  may  say  that  there  are  practically  three  opposing 
views  as  to  the  real  nature  of  credit.  First,  there 
are  those  writers,  who,  like  Nebenius  and  Rau,  start 
Three  oppos-  from  the  etymological  meaning  of  the 
ing  views  as      ^^^^^  ^^^  maintain  that  the  confidence. 

to  the  nature 

of  credit.  or  trust,  rcposed  by  the  creditor  in  the 

ability  of  the  debtor  to  fulfil  an  agreement  in  the 
future  is  the  chief  element  in  credit. ^  Second,  there 
is  a  class  of  writers  who,  like  Knies,  regard  this 
element  of  confidence,  a  mere  psychical  condition,  as 
too  intangible,  too  immaterial,  to  be  of  any  value  for 
a  scientific  definition.  They  proceed  entirely  from 
observation  of  those  transactions  which  are  said  to 
involve  the  use  of  credit,  and  find  in  all  such  trans- 
actions one  feature  which  is  never  present  in  trans- 
actions not  designated  as  credit  transactions.  That 
feature  is  that  the  completion  of  the  transaction  is 
regarded  as  being  postponed  to  a  future  time.  This 
element  of  time,  this  postponement,  must  then,  they 
argue,  be  the  essence  of  credit.     Credit  is,  in  their 

1  A  good  idea  of  the  extent  of  the  controversy  and  of  the  con- 
flicting views  can  be  gained  from  Knies,  Ber  Kredit,  Berlin,  1876. 

2  Nebenius,  Der  offentliche  Credit,  Carlsruhe  und  Baden,  2d  ed., 
1829  ,  Rau,  Finanzwissenschaft,  3d  ed.,  Heidelberg,  1861 ;  II.  Abt., 
p.  248. 


CHAP.  I  PUBLIC  INDEBTEDNESS  373 

eyes,  merely  a  means  of  transferring  ownership  tem- 
porarily, a  means  of  paying  for  present  goods  with  a 
greater  quantity  of  future  ones.  Third,  there  is  still 
another  school,  who,  like  McLeod,  regard  credit  as 
analogous  to  money,  money  being  regarded  as  repre- 
senting claims  on  the  wealth  of  the  whole  community, 
while  a  credit  is  a  similar  claim  on  the  wealth  of 
some  particular  individual.  McLeod  even  goes  so 
far  as  to  identify  the  claim,  the  order,  the  promise  to 
pay,  or  the  right  to  demand  with  "  the  credit."  "  A 
credit,"  says  McLeod,  "in  Law,  Commerce,  and 
Economics,  is  the  Right  which  one  Person,  the  Cred- 
itor, has  to  compel  another  Person,  the  Debtor,  to 
Pay  or  Do  something."^ 

Sec.  3.  These  definitions,  apparently  so  contra- 
dictory, are  not  altogether  irreconcilable.  They 
represent  different  points  of  view  rather  Reconciliation 
than  real  differences  in  meaning.  Cer-  ^f  ^^««^  ^*«^«- 
tainly  nothing  but  credit  is  described  by  any  one  of 
the  three  definitions,  and  certainly  there  are  shades 

1  Theory  of  Credit^  Vol.  I.,  p.  315.  In  a  very  scholarly  article 
published  in  the  Quarterly  Journal  of  Economics^  January,  1894, 
Professor  Sherwood  discusses  the  nature  and  mechanism  of  credit 
in  a  way  to  throw  a  great  deal  of  new  light  upon  the  subject.  I 
do  not  believe  that  his  analysis  can  be  improved  upon.  He  dis- 
tinguishes particularly  the  credit  basis  of  money,  as  generic  or 
universal  credit  (which  he  calls  "customary  credits"),  from  that 
of  the  commonly  so-called  credit  transactions,  which  he  calls  "for- 
mal credits."  It  is  with  the  latter  only  that  we  are  concerned 
here.  They  are  legally  enforcible.  They  rest  in  the  economic 
sense  "on  a  psychological  trait  of  faith  in  the  uniformity  and 
reasonableness  of  other  men's  voluntary  acts." 


S74        INTRODUCTION  TO  PUBLIC  FINANCE    part  in 

of  the  meaning  of  the  term  that  are  aptly  described 
by  each  of  them.  As  is  so  often  the  case  when  a 
word  in  common  use  is  defined  for  scientific  pur- 
poses in  several  ways,  we  find  that  one  definition  fits 
certain  classes  of  things  covered  by  the  term  better 
than  others.  There  are  certain  debts,  for  example, 
in  which  the  element  of  trust  is  paramount,  others 
in  which  that  of  time  is  more  important,  and  again 
some  in  which  the  element  of  claim  or  demand  is  the 
distinguishing  thing.  But  it  is  also  true  that  there 
are  no  cases  of  the  existence  of  credit  where  all 
three  of  these  features  do  not  appear,  the  one  or  the 
other  varying  in  importance  as  the  case  may  be. 
To  fully  understand  a  thing  so  many-sided  as  credit, 
it  is  necessary  to  examine  it  from  several  points  of 
view. 

If  we  start  from  the  etymological  meaning  of  the 
term,  we  cannot  avoid  the  conclusion  that  one  of  the 
chief  elements  of  credit  is  trust.  Certainly  without 
that  intangible,  unmeasurable  feeling  or  frame  of 
mind  known  as  confidence,  trust,  or  faith,  on 
Confidence  a  ^hich  Kuics  pours  SO  much  scorn,  no 
necessary  debts  would  havc  comc  iuto  existence. 
^^  *  As  Professor  Cohn  well   says,    "  Credit 

rests  on  the  development  of  opinions  and  institutions 
which  arise  with  the  general  advance  of  civilisa- 
tion." ^  Modern  usage  has  not  yet  eliminated  this 
original  meaning  from  the  term.  It  cannot  be 
altogether  incorrect  to  make  this  a  part  of  the  defi- 
^  Grundlegung,  p.  553. 


CHAP.  I  PUBLIC  INDEBTEDNESS  375 

nition.  It  is  customary  enough  to  conceive  that 
credit  or  faith  is  reposed  by  the  creditor  in  the 
debtor,  and  that  it  varies  in  amount,  although  never 
exactly  measurable.  But  there  are  many  credit 
transactions  in  which  the  element  of  trust  shrinks 
into  insignificance.  An  advance  on  a  warehouse 
receipt,  a  Lombard  loan,  a  pawnbroker's  advance, 
all  of  these  and  many  like  them  are  credit  transac- 
tions, but  the  element  of  personal  confidence  plays 
little  part  in  these.  The  creditor  in  these  cases 
never  has  to  consider  the  character  of  the  debtor 
nor  his  ability  or  willingness  to  pay.  After  he  has 
satisfied  himself  as  to  the  value  of  the  security,  all 
that  he  has  to  consider  is  the  time  the  Time  also 
debt  has  to  run.  It  must  be  admitted,  essential. 
then,  that  there  are  a  number  of  cases  of  credit 
transactions  in  which  the  paramount  element  is  that 
of  time.  The  first  two  of  the  above-stated  views  of 
the  nature  of  credit  are,  therefore,  reconcilable  in 
this  way.  They  may  be  regarded  as  essentially  the 
same  with  a  difference  in  the  emphasis,  and  it  is 
correct  to  change  the  emphasis  when  different  kinds 
of  debts  are  considered.  Both  of  them  may  be 
covered  by  one  definition,  which  may  for  two  reasons 
be  called  the  subjective  definition  :  (1)  because  it 
takes  into  consideration  feelings,  opinions,  i.e.  trust, 
confidence,  belief;  (2)  because  it  looks  at  credit 
from  the  natural  point  of  view  of  the  creditor  who 
entertains  that  trust. 

Subjective  Definition.  —  From  the  subjective  stand- 


376        INTRODUCTION   TO  PUBLIC  FINANCE    part  m 

point  credit  is  the  confidence  or  trust  reposed  by 
one  person  in  the  ability  of  some  other  person  to 
fulfil  a  promise  at  some  future  time.  The  emphasis 
will  fall  upon  the  feature  of  trust  or  upon  that  of 
time  according  to  the  nature  of  the  particular  debt 
in  point. 

But  that  is  not  all :  we  have  yet  to  dispose  of  that 
view  which  identifies  credit  with  the  claim  which 
the  creditor  has  on  the  debtor.  In  one  aspect  this 
view  seems  absolutely  contradictory  to  that  which 
we  have  adopted.  So  much  so  that  Knies  ridicules 
it,  considering  it  quite  as  absurd  as  the  reasoning  of 
John  Law.  He  says  it  makes  the  debtor  give 
credit:  i.e.  he  gives  the  claim,  and  the  claim  is 
credit.  But  McLeod's  reasoning  is  not  so  easily 
The  objective  disposed  of .  He  has  taken  what  may  be 
point  of  view.  ^^q\\  called  the  objective  view.  He  has 
sought  out  embodied  credit.  His,  too,  is  the  natu- 
ral point  of  view  of  the  debtor.  The  opposition, 
therefore,  between  the  two  views  is  more  apparent 
than  real,  and  arises  from  the  fact  that  each  is 
from  a  different  point  of  view.  There  are  two 
sides  to  the  shield.  The  debtor  sells  a  claim  (a 
chose  in  action)  which  is  a  more  or  less  tangible 
thing  having  a  present  value,  just  as  many  another 
right  has;  as,  for  example,  a  patent  right  or  a  copy- 
right. The  debtor  is  concerned  only  with  the  value 
of  that  claim.  The  creditor,  however,  looks  beyond 
the  claim  and  desires  to  know  whether  he  can  trust 
in  the  ability  of  the  debtor  to  make  the  claim  good. 


CHAP.  I  PUBLIC  INDEBTEDNESS  377 

By  a  very  natural  analogy,  too,  the  language  of 
business  says  that  the  debtor  enjoys  good  or  bad 
credit,  as  though  the  trust  reposed  in  him  by  others, 
in  whose  minds  it  exists,  really  became  an  attribute 
of  him.  There  is  still  more  ground  for  McLeod's 
view,  for,  as  has  already  been  remarked,  it  is  often 
the  nature  of  the  claim  created  that  adds  to,  or  de- 
tracts from,  the  credit.  Any  man,  in  ordinary  times, 
can  obtain  credit,  if  he  comes  prepared  with  collat- 
eral security  and  is  ready  to  create  a  claim  that  is 
good  on  that  in  case  his  other  resources  fail  him. 
It  is  clear,  then,  that  the  view  of  McLeod  is  im- 
portant, and  also  that  it  is  supplementary  to  that 
already  adopted.  It  reveals  many  phases  of  credit 
that  cannot  be  seen  at  all  from  the  subjective  point 
of  view.  The  two  views  taken  together  make  a 
complete  explanation. 

Objective  Definition. — From  the  objective  stand- 
point, credit  is  embodied  in  claims  which  are  ac- 
cepted by  the  creditor  in  payment.  These  objective 
claims  have  a  value  like  every  other  exchangeable 
commodity,  and  are  recorded  in  the  various  "  instru- 
ments of  credit." 

If  these  two  definitions  are  accepted,  we  can  pro- 
ceed to  point  out  wherein  public  credit  differs  from 
ordinary  or  private  credit.     The  pecul-  Public  credit 
iar  conditions  which  distinguish   public  Qr^^arv^ 
credit  from  ordinary  credit   arise   from  credit. 
the  fact  that  the  debtor  is  the    State.     The   State, 
being  above  the  law,  cannot   be   compelled,  as  the 


378        INTRODUCTION  TO  PUBLIC  FINANCE    part  in 

private  individual  can,  to  pay  its  debts.  Public 
credit  is  therefore  subjectively  defined  as  the  confi- 
dence or  trust  reposed  in  the  ability  and  willingness 
of  the  debtor  (the  State)  to  fulfil  its  promises  at  some 
future  time.  Objectively  the  claim  (in  this  case  the 
bond)  shrinks  to  the  character  of  an  unsupported 
although  generally  accepted  promise.  There  are,  to 
be  sure,  some  important  cases  in  which  the  claim  is 
apparently  supported  by  something  more  definite 
than  the  mere  promise  of  the  debtor ;  as,  for  example, 
when  the  revenues  from  certain  productive  enter- 
prises are  pledged  for  the  support  of  the  debt 
charges.  But  even  in  these  cases,  the  creditor  has 
no  real  resource  against  intentional  bad  faith.  In 
general  the  subjective  standpoint  gives  a  better 
view  of  public  credit  than  the  objective,  because 
the  claims  cannot  be  enforced. 

The  fact  that  the  debtor  is  the  State  has  other 
important  consequences.  (1)  The  State  has  sover- 
eign power  and  can  compel  its  subjects  to  lend  to 
it;  or,  on  the  other  hand,  the  creditor  may  make 
Other  differ-      ad  vauccs  ou  rather  poorer  terms  than  he 

ences  between  i  i        ■  i  •  ,       f 

public  credit  ^^^^^  Otherwise  accept,  from  motives 
and  private,  of  patriotism.  (2)  The  debtor  State 
lives  forever,  and  hence  can  make  perpetual  debts. 
(3)  Its  affairs  are  all  open  to  inspection,  and  the 
would-be  creditor  has  full  opportunity  to  know  its 
ability  to  pay.  (4)  Public  credit  may  be  divided 
into  various  parts,  according  as  it  is  the  credit  of  the 
central  government  or  of  some  subordinate  depart- 


CHAP.  I  PUBLIC  INDEBTEDNESS  879 

mept  that  is  being  considered.  The  consideration 
of  the  relations  of  the  different  parts  of  the  govern- 
ment in  this  respect  belongs  to  the  field  of  public 
law  rather  than  to  that  of  public  finance. 

Sec    4.    Public   credit   was   necessarily    later   in 
development   than    private   credit.     General   habits 

of  lending  on  a  large  scale   had   to   be  ^,   , 

-      ^  °  ^  The  late  Re- 

established before  nations  could  borrow,  veiopment  of 
The  bankers  and  brokers  of  the  world  vuhiiccredU. 
had  to  develop  the  machinery  for  handling  evi- 
dences of  debt  before  large  public  loans  could  be 
placed.  Then,  too,  inasmuch  as  the  objective  evi- 
dences of  debt  in  the  case  of  the  government  were 
nothing  but  the  unsupported  promises  of  the  gov- 
ernment, confidence  that  these  promises  would  be 
kept  had  to  grow.  At  first  the  assurance  rested  on 
the  honour  of  the  monarch,  or  upon  some  pledge  or 
security  given  by  him,  such  as  the  crown  jewels,  crown 
lands,  a  lease  of  the  revenues,  and  the  like.  But 
later,  as  Bastable  so  ably  shows,^  the  development  of 
public  credit  goes  hand  in  hand  with  the  develop- 
ment of  constitutional  government.  It  would  seem 
that  the  control  of  the  purse  by  the ,  very  persons 
who  were  to  pay  the  taxes  gave  a  steadiness  and 
security  to  the  financial  administration  that  aroused 
the  confidence  of  money  owners. 

Sec.  5.    Much  attention  has  been  given  by  differ- 
ent authors  to  the  economic  effects  of  public  bor- 
rowing.    It  is  now  pretty  well  agreed  that   public 
i  P.  679. 


380         INTRODUCTION   TO  PUBLIC  FINANCE    part  hi 

borrowing  does  not,  as  was  once  tauglit,^  create  ijew 

wealth  except  indirectly,  through  the  use  made  of 

the   capital   taken   when   it    is    used   productively. 

Nor,  on  the  other  hand,  does  public  bor- 

Economic 

effects  of  pub-  rowing  in  itself  directly  destroy  wealth. 
lie  borrowing,  rpj^^  moncy  borrowcd  may  be  devoted  to 
some  form  of  rapid  consumption,  as  in  war.  In  this 
case  the  destruction  of  wealth  is  determined  by  the 
line  of  expenditure  decided  upon,  not  by  the  bor- 
rowing merely.  But  the  feasibility  of  obtaining 
large  sums  in  this  way  is  said  to  lead  to  more  ex- 
travagant expenditure  than  would  otherwise  be  in- 
dulged in,  since  taxation  for  such  purposes  would 
be  difficult.  The  consumed  wealth  is  replaced  by 
claims  upon  future  wealth  which  are  not  of  such  a 
character  as  to  be  available  as  productive  capital. 
But  the  loss  incurred  is  distributed  over  many  years 
instead  of  being  concentrated  in  a  few.  As  in  the 
case  of  a  spendthrift  who  mortgages  his  patrimony 
for  wasteful  extravagance,  so  in  the  case  of  a  nation 
which  borrows  for  war,  the  evil  that  arises  is  from 
the  waste  of  war,  not  from  the  borrowing.  For  a 
State  to  borrow  for  a  productive  purpose  has  no  other 
economic  effect  than  for  a  private  corporation  to  do 
the  same. 

Sec.  6.    There  has  also  been  some  discussion   of 

the   relative  merits  of   domestic   and  foreign  loans, 

and  their  differing  economic  effects.     Sometimes  it 

has   been   claimed  that   foreign   loans   involve   less 

1  "  The  public  funds  a  mine  of  gold." 


CHAP.  I  PUBLIC  INDEBTEDNESS  381 

disturbance  of  domestic  industry.  The  intimate  re- 
lation existing  between  modern  nations  ^o serious df 
in  their  commercial  and  industrial  en-  ferenceinthe 
terprises  destroys  to-day  almost  all  the  ^^^TJiiZls- 
significance  that  might  formerly  have  ticioans. 
attached  to  such  a  discussion.  The  payment  of  the 
French  indemnity  of  5,000,000,000  francs  to  Germany 
after  the  war  of  1870  w£ts  carried  out  in  twenty- 
seven  months,  and  not  one  single  serious  difficulty 
or  disorder  in  the  financial  centres  was  produced 
by  it.i  So  great  is  the  mobility  of  modern  capi- 
tal and  so  vast  are  the  current  transactions,  that  all 
of  this  money  could  be  easily  turned  into  the  same 
stream  without  disturbing  its  placid  surface. 

Public  credit  is  a  plant  of  slow  growth  ;  more  than 
that,  it  is  a  delicate  plant.  It  may  be  The  frailty  of 
injured  beyond  recovery  by  a  single  case  vuhiic  credit. 
of  failure  to  fulfil  the  promise  in  which  it  found 
expression.  Many  of  the  commonwealths  of  the 
United  States  have  repudiated  their  debts,  and  have 
since  then  recovered  their  power  to  borrow  but 
slowly,  and  in  some  instances  scarcely  at  all.^  Weak 
nations  which  may  be  or  have  been  coerced  by 
stronger   and    wealthier  nations  in  the   interest   of 

1  Blackioood' 8  Edinburgh  Magazine,  February,  1875,  pp.  172-187. 

2  Under  the  Eleventh  Amendment  to  the  federal  Constitution, 
a  state  cannot  be  sued  in  a  federal  court.  This  is  contrary  to  the 
original  intention  of  the  Constitution.  See  my  monograph,  Das 
Kreditwesen  der  Staaten  und  Stddte  der  Nordamerikanischen 
Union  in  seiner  historischen  Entwickelung,  Jena,  1891.  Egypt  is 
a  good  example  of  foreign  coercion  to  enforce  debt  payment. 


382         INTRODUCTION  TO  PUBLIC  FINANCE    part  hi 

citizens  of  the  latter  who  were  creditors  of  the 
former,  generally  borrow  more  easily  than  stronger 
independent  nations,  or  parts  of  strong  confedera- 
tions, which  have  failed  to  meet  their  obligations 
and  cannot  be  coerced. 

The  credit  of  local  governing  bodies  depends  in 
great  measure  upon  their  powers  and  duties  in 
public  law.  Generally  speaking,  a  "  municipal  cor- 
poration," when  acting  legally  within  the  sphere 
prescribed  to  it,  is  like  a  private  company,  —  its 
obligations  can  be  enforced  by  legal  or  judicial  pro- 
cedure. Unlike  the  sovereign  State,  a  municipality 
can  be  sued  without  its  consent.  Only  with  the 
positive  sanction  of  the  sovereign  State  can  a  mu- 
nicipality default  and  escape  punishment  therefor. 


CHAPTER   II 

FOBMS  OF   PUBLIC   DEBTS 

Section  1.    Governments  may  borrow  money  in 
almost  any  of  the   ways  which  an   individual   may 
use.     These  different  forms  can  be  best  classification 
made  clear  in  connection  with  their  clas-  ^ho'^d  show 
sification.     The  principles  upon  which  a  on  which  e^h 
useful  classification  can  be  built  are  those  ^^^^  ^^*^*- 
developed  in  the  preceding  chapters.     Public  debts 
are  forms  of  public  credit,  and  the  kind  of   credit 
upon  which  each  debt  is  based  can  be  shown  in  the 
classification.     Some  light   can   be   thrown   on   the 
different  forms   of   debt   by  a  review   of   the  older 
classifications.     One  of   the  commonest  distinctions 
is  that   between  funded  and  floating  debts.     Orig- 
inally, this  distinction  was  very  simple,  and  corre- 
spondingly useful.     In  the  words  of  Adam  Smith  : 
"Nations,  like  private  men,    have   gen-  ^^„^,^„^ 
erally  begun  to  borrow  upon  what  may  unfunded 
be  called  personal  credit,  without  assign- 
ing or  mortgaging  any  particular  fund  for  the  pay- 
ment of  the  debt ;  and  when  this  resource  has  failed 
them,  they  have  gone  on  to  borrow  upon  assignments 
or   mortgages   of    particular   funds."     The   first   of 
these  is  the  unfunded  debt,  the  other  is  the  funded? 


384        INTRODUCTION   TO  PUBLIC  FINANCE     part  hi 

liebt.i  But  although  these  terms  are  still  in  com- 
mon use,  the  meaning  attributed  to  them  has  so 
entirely  changed,  that  to-day  the  so-called  floating 
or  unfunded  debt  consists,  in  large  part,  of  out- 
standing claims  upon  very  definite  revenues,  while 
it  is  often  the  case  that  no  particular  fund  or  source 
of  revenue  is  directly  pledged  for  the  payment  of 
the  so-called  funded  debt.  Hence  it  is  that  Pro- 
fessor Cohn  treats  Smith's  grounds  of  distinction  as 
antiquated,  and  says  that  the  real  distinction  is 
found  in  the  fact  that  the  funded  debts  are  those 
of  longer  duration,  and  the  floating  debts  those  of 
shorter  duration,  "  although,"  he  adds,  "  different 
causes  and  purposes  of  credit  lie  behind  the  differ- 
ence in  duration. "2  The  most  elaborate  attempt 
Wagner's  ^^  explain  the  modern  use  of  these 
distinctions,  terms  is  that  of  Wagner.  As  it  is  so 
complete,  it  is  well  worth  summarising  here.  Funded 
and  floating  debts  can  be  distinguished  by  the  fol- 
lowing characteristics,  which  are  more  or  less  clearly 
recognisable  in  the  different  cases:  (1)  the  purpose 
of  the  loan  —  floating  debts  are  generally  for  rapidly 
passing  needs,  especially  for  the  payment  -of  the 
current  dues  of  the  treasury  :  funded  debts  are  to 
supply  the  capital  for  permanent  needs  of  the  civic 
household  ;  (2)  continuance  of  the  debt  —  together 
with  the  former  characteristic,  relatively  shorter 
continuance  of  floating  debts,  at  least  in  intention ; 

1  Wealth  of  Nations,  Bk.  V.,  Chap.  III. 

2  Finanswissenscha/t,  p.  757. 


CHAF.  II  FORMS   OF  PUBLIC  DEBTS  385 

longer  continuance  of  funded;  (3)  the  legal  con- 
ditions of  repayment  —  in  the  case  of  floating  debts 
the  different  items  are  repayable  at  sight  or  within 
a  comparatively  short  period  ;  in  that  of  the  funded, 
the  creditor  has  a  more  limited  control  over  the 
principal,  the  debtor  (the  State)  being  bound  to  re- 
payment according  to  a  fixed  plan  for  amortisation, 
or  making  no  agreement  as  to  the  repayment  of  the 
principal.  This  last  is  regarded  as  the  essential 
test.i 

The  difficulty  found  in  drawing  a  sharp  line  be- 
tween these  two  classes  arises  from  the  fact  that  the 
distinction  is  at  best  purely  an  arbitrary  one.  It 
may  differ  from  state  to  state,  or  from  time  to  time 
in  the  same  state,  according  to  the  temporary  whim 
of  the  public  official  or  statistician.  The  terms  are 
relative  ones.  By  a  floating  debt  is  generally  meant 
one  that  is  regarded  by  the  person  using  the  term 
as  a  temporary  one.  One  official  will  call  any  debt 
temporary,  or  a  floating  debt,  which  has  three,  five, 
or  even  ten  years  to  run  ;  while  another  will  refuse 
the  term  to  any  debt  that  is  to  run  longer  than 
six  months  or  a  year.  Strictly  speaking,  the  term 
"floating  debt"  ought  never  to  be  applied  to  any 
debt   that   is,    on   the   face   of    it,  to    run    beyond 

1  Most  writers  make  use  of  these  terras ;  few  have  defined  them 
so  accurately  as  Wagner.  For  example,  Adams,  Public  Debts, 
p.  147,  concedes  the  term  "  floating  debt  "  only  to  those  in  which  the 
government  retains  the  right  to  investigate  each  particular  claim. 
This  necessitates  a  new  class  of  "  temporary  debts,"  consisting  of 
treasurer's  notes,  bills  of  exchequer,  and  the  like. 
2c 


INTRODUCTION  TO  PUBLIC  FINANCE    part  hi 

the  end  of  the  fiscal  year  next  succeeding  that  in 
which  it  is  created.  But  there  is  no  established 
custom  for  such  a  limitation.  In  trying  to  draw  a 
sharp  line  between  these  two  classes,  we  meet  with 
the  same  difficulty  that  we  met  in  attempting  to  dis- 
tinguish between  direct  and  indirect  taxes.  But  we 
have  even  less  to  go  upon.  Official,  statutory,  and 
scientific  usage  varies  so  much  that  nothing  is  gained 
by  attempting  to  collate  all  the  meaning^.  Even 
for  the  most  general  scientific  purposes,  therefore, 
these  terms  are  of  little  value,  and  for  the  purposes 
of  classification  the  distinction  is  absolutely  useless. 
Sec.  2.  There  are  two,  and  only  two,  ways  in 
which  a  State  may  borrow.  It  may  compel  persons 
Forcedioans  ^^  l^nd  to  it,  or  it  may  offer  terms  to 
and  contrac-      which  persons  agree.     The  first  of  these 

ttujl. 

will  be  called,  for  convenience,  forced 
loans;  the  second  contractual.^  This  distinction  into 
two  classes  according  to  the  motives  appealed  to  is 
primary.  The  first  class  consists  of  loans  that  are 
now  comparatively  unimportant  and  rare.  They 
were  once  more  common. ^  Few  nations  now  have 
resort  to  forced  loans,  even  to  the  limited  extent  of 

1  Leroy-Beaulieu,  Adams,  andBastable  make  use  of  a  third  class 
called  "patriotic  "  loans.  They  have  three  classes,  forced,  patri- 
otic, and  "  voluntary."  The  need  of  this  second  class  is  not  clear. 
The  patriot  differs  from  the  other  creditors  only  in  that  he  accepts 
worse  terms,  or  apparently  such.  Unless  he  waive  all  claim  to 
repayment,  in  which  case  there  is  no  debt,  his  loan  differs  from 
those  of  the  third  class  only  in  that  it  is  even  more  "  voluntary." 

2  See  Roscher,  §  132. 


CHAP    II  FORMS   OF  PUBLIC  DEBTS  387 

paying  their  current  expenses  in  bonds,  and  compel- 
ling persons  having  claims  to  accept  them.  There  is 
a  form  of  quasi-forced  loan,  that  is  of  some  interest. 
That  is  the  use  of  irredeemable  paper  irredeemable 
money.  This  is  very  commonly  spol?  en  of  p«per  money. 
as  a  forced  loan.  It  must  be  observed,  however,  that 
it  is  a  loan  only  when  the  government  making  such 
issues,  directly  or  indirectly,  promises  to  redeem  the 
notes  at  some  future  time.  Otherwise  no  debt  has 
been  created.  When  such  money  is  issued  with  the 
purpose  of  retaining  it  in  circulation  permanently,  it 
is  not,  in  intention  at  least,  a  debt ;  but  it  is  a  form 
of  forced  payment  more  akin  to  a  tax.  Even  when 
there  is  a  promise  to  redeem  the  money  at  some 
future  time,  this  forced  loan  shows  few  of  the  funda- 
mental features  of  a  debt.  Every  debt  involves  the 
use  of  credit.  1  Now  from  the  subjective  side  there 
is  little  or  no  credit  involved  in  this  case.  The 
trust  or  confidence  amounts  to  nothing  more  than  a 
belief  in  the  stability  of  the  government  and  a  readi- 
ness to  obey  its  authority.  From  the  objective  side 
the  creditor,  if  we  may  call  him  such,  receives  a 
claim  that  is  satisfiable  not  from  the  goods  of  the 
debtor  as  in  other  cases,  but  from  the  goods  of  the 
community,  and  that  by  law.  Unlike  money  of 
"final  redemption,"  these  notes  cannot  properly 
be  said  to  be  based  even  upon  customary  credit. 
From    both   points   of    view,   then,   these   so-called 

1  Formal  credit,  to  use  Professor  Sherwood's  term ;  see  note, 
p.  373. 


388         INTRODUCTION  TO  PUBLIC  FINANCE    part  hi 

forced  loans  are  scarcely  more  than  quasi-debts. 
They  are  also  quasi-taxes.  Dietzel  maintained  that 
these  loans  were  merely  taxes. 

Sec.  3.  Among  the  contractual  debts  the  first 
thing  that  strikes  us  is  that  certain  of  the  contracts 
contain  features  especially  intended  to  add  to  or 
insure  the  confidence  of  the  creditor,  while  in  others 
there  is  little  or  nothing  looking  to  that  end.  This 
at  once  suggests  two  natural  subdivisions  of  con- 
^.  .  .       ^     tractual  debts.     On   the   obiective   side 

Divisions  of  ■^ 

contractual  the  first  class  consists  of  claims  good 
debts.  ^^  upon  particular  funds,  or  (2)   upon 

particular  revenues  or  the  revenues  of  a  particular 
period,  or  (3)-  upon  certain  definite  portions  of  the 
general  revenue  permanently  set  aside  to  meet  them. 
These  three  bases  for  the  claims  suggest  three  natural 
subdivisions  of  the  first  class.  Of  these  three  again, 
the  second,  consisting  of  those  claims  which  bear 
upon  certain  definite  revenues,  may  be  most  conven- 
iently analysed  according  to  the  classification  that 
was  adopted  for  public  revenues. 

The  most  important  element  of  those  debts,  the 
contracts  for  which  contain  no  provisions  directly 
intended  to  insure  the  confidence  of  would-be  cred- 
itors, is  the  length  of  time  that  the  debt  has  to  run, 
or,  what  is  much  the  same  thing,  the  relative  size  of 
the  demands  made  thereby  on  the  general  revenue. 
Here  we  find  that  certain  contracts  call  (1)  for  the 
repayment  of  the  principal  only,  some  (2)  for  the 
payment    of    principal    and    interest,    while    others 


CHAP.  II  FORMS   OF  PUBLIC  DEBTS  389 

(3)  call  for  the  jDayment  of  interest  only.  To 
shorten  the  matter,  the  whole  classification  will  now 
be  presented  in  the  form  of  a  table.  The  names  of 
the  classes  are  generally  self-explanatory,  but  in 
some  cases,  for  clearness'  sake,  a  concrete  or  a  gen- 
eral example  is  appended. 

I.  Forced  Debts:  (Now  mostly  obsolete.  Akin 
thereto  are  the  quasi-debts  in  the  form  of  irre- 
deemable paper  money.) 

II.  Contractual  Debts: 

A.    The  contracts  for  which  contain  provisions 
,^^"\  directly   intended   or   calculated   to    insure 

[^jX*-^^         additional  confidence.    Such  confidence  rest- 

•  1.    On  the  fact  that  the  sums  received  from 
the  creditor  are  not  expended  but  are 
retained  to  meet  the  debt  charges. 
These  are  of  two  kinds : 

a.  Voluntary  deposits : 

1)  Without  interest.  Ex.  Post- 
office  orders. 

2)  With  interest.  Ex.  Deposits  in 
public  banks,  etc. 

3)  Insurance  (not  compulsory). 

b.  Statutory  deposits : 

1)  Guarantee  funds  of  various  kinds, 
with  and  without  interest.  Ex. 
Deposits  by  insurance  companies 
to  protect  policy-holders,  etc. 

2)  Insurance  (compulsory). 


390        INTRODUCTION  TO  PUBLIC  FINANCE    part  ii\ 

3)  Deposits  of  coin  or  bullion  to 
secure  circulating  notes.  Ex. 
United  States  silver  and  gold 
certificates. 

4)  Estates  in  hands  of  the  courts 
pending  litigation. 

2.    On    the    fact    that    definitely    specified 
revenues  are  set  aside  for  the  payment 
of  the  debt  (subdivided  according  to  the 
classification  of  revenues). 
a.   Based  generally  on  the  revenues  of  a 
definite  period.     Debts  contracted  in 
anticipation   of    the   revenues.      Ex- 
chequer bills  and  redeemable  notes. 
.  h.    Based  on  prices  or  rates.     Ex.  Money 
borrowed    for    the    establishment   of 
some   productive  enterprises   carried 
on   in  a  manner    similar   to   private 
enterprises  of  the  same  character. 

c.  Based  on  fees.     Ex.  Some  Municipal 
bonds  for  waterworks. 

d.  Based  on  special  taxes  : 

1)  By  the  method  of  farming  taxes 
(now  obsolete). 

2)  By  appropriating  special  taxes 
(or  a  percentage  of  all  taxes), 
and  putting  the  funds  thus  re- 
ceived into  the  hands  of  trus- 
tees, for  the  payment  of  the 
debt. 


CHAP.  II  FORMS   OF  PUBLIC  DEBTS  391 

B.  Where  confidence  is  so  assured  that  no 
special  means  are  taken  to  arouse  it.  Clas- 
sified according  to  the  thing  promised : 

1.  Principal  only.  Ex.  Redeemable  notes 
(money)  not  legal  tender,  and  not  as- 
sured by  any  deposit. 

2.  Principal  and  interest : 

a.  Bonds  sold  in  the  market  for  what 
they  will  bring,  and  bearing  a  fixed 
rate  of  interest,  payable  at  a  set  time 
or  in  instalments. 

h.  Annuities,  terminable  at  the  end  of 
a  definite  or  indefinite  period,  as  a 
term  of  years  or  a  life,  so  calculated 
that  at  the  end  of  the  period  the 
amount  paid  shall  equal  the  princi- 
pal and  interest.  These  may  be  in 
many  different  forms;,  they  may  be 
arranged  in  the  form  of  life  annui- 
ties, of  pensions,  of  lotteries,  or  in 
that  of  tontines  and  the  like. 

3.  Interest  only  : 

a.  "Perpetual  bonds,"  in  the  case  of 
which  the  creditor  has  no  right  to 
demand  the  payment  of  the  bond 
within  any  definite  period,  but  the 
government  may  generally,  after  a 
fixed  time  has  elapsed,  redeem  the 
bonds  for  a  stated  sum. 

h.    Permanent  annuities. 


392         INTRODUCTION   TO  PUBLIC  FINANCE    part  \\\ 

Sec.  4.  In  the  great  majority  of  cases  in  modern 
times,  the  leading  nations  are  able  to  borrow  with- 
out particular  reference  to  any  special  means  of 
arousing  confidence.  The  long  period  through 
which  they  have  faithfully  fulfilled  all  their  obliga- 
tions has  so  thoroughly  established  their  credit  that 
their  bonds  stand  amons^  the  best  securi- 

Means  of  ^ 

aUuring  tics  on  the  market.     The  only  changes 

ere  itors.  ^j^^^  ^^^  ^yQ  made  in  these  debts  are  such 

as  are  intended  to  make  the  annual  burden  as  small 
as  possible.  Some  of  the  things  desired  by  creditors, 
and  which,  while  not  affecting  the  credit  of  the 
borrowing  State,  yet  add  to  the  readiness  with  which 
the  bonds  sell,  are  (1)  that  the  debt  shall  not  be 
redeemed  arbitrarily  for  a  capital  sum  which  would 
not  yield,  at  the  market  rate  of  interest,  the  same 
annual  income  as  the  bond;  (2)  that  any  chance 
gains  that  may  arise,  as  from  a  fall  in  the  market 
rate  of  interest,  may,-  for  a  time  at  least,  accrue 
definitely  to  the  holder. 

By  far  the  larger  part  of  European  debts  consist 
of  the  so-called  "  perpetual  "  bonds.  These  bonds, 
"Perpetual"  which  generally  name  a  certain  capital 
bonds.  g^jjj  Q^^  which  they  may  be  redeemed,  con- 

tain no  date  at  which  they  mature.  They  are  re- 
deemable whenever  the  debtor  (the  State)  chooses, 
subject  in  some  instances  to  certain  limitations  for 
the  greater  security  of  the  lender  ;  for  example,  the 
publication  of  notice  of  intention  to  redeem  or  prom- 
ise not  to  redeem  for  a  certain  period.     These  "per- 


1 


CHAP.  II  FORMS   OF  PUBLIC  DEBTS  393 

petual "  bonds  are  for  both  parties  a  very  convenient 
form.  What  they  amount  to  is  that  the  State  sells 
an  annuity  for  what  it  will  bring,  with  the  privilege 
of  redeeming  it  at  any  time  for  a  certain  sum,  but  it 
cannot  be  compelled  to  redeem  it  at  any  inconvenient 
time.  The  creditor,  owing  to  the  publicity  which 
to-day  attends  all  public  affairs,  knows  what  provi- 
sions can  be  made  for  the  repayment,  and  consequently 
knows  approximately  how  long  his  annuity  will  run. 
He  can,  moreover,  easily  dispose  of  it  through  the 
stock  market  if  he  should  need  the  money  for  other 
purposes. 

This  form  was  once  used  in  the  United  States,  but 
traditions  of  rapid  payment  led  to  the  adoption  of 
different  forms.  ^     The  first  debts  of  the    e.    ,   ^  r. 

harly  debts 

United  States  had  been  made  in  the  form  of  the  United 
of  simple  perpetual  bonds  with  no  limits.  ^^^*^^- 
The  debts  created  after  the  War  of  1812  were  also 
of  that  variety,  with  a  limit  of  time  set  within  which 
it  was  promised  not  to  redeem  them.  But  the  varia- 
tion just  referred  to  was  introduced  in  1862.  This 
form  has  been  called  the  "  limited  option "  debt. 
The  bonds  were  "  redeemable  at  the  pleasure  of  the 
United  States  after  five  years,  and  payable  twenty 
years  from  date"  of  issue.  They  were  called  "  five- 
twenties."  A  similar  plan  was  followed  in  the  so- 
called  "  ten-forties."  The  only  advantage  gained  by 
thus  fixing  a  limit  at  which  the  creditor  is  to  expect 
the  payment  is  that  the  fiscal  officers  may  have  a 
1  See  Adams,  Public  Debts,  p.  162. 


394        INTRODUCTION  TO  PUBLIC  FINANCE    part  hi 

definite  goal  toward  which  to  work.  If  a  termin  is 
set,  it  is  easy  to  urge  the  extinction  of  the  debt  at  or 
before  that  time,  and  consequently  the  adoption  of 
special  means  and  efforts  toward  that  end. 

Sec.  5.  Next  in  bulk  are  the  "terminable"  annui- 
ties. These  may  be  terminable  at  the  end  of  a  cer- 
>> Terminable"  ^^i^  pcHod  or  at  the  death  of  the  holder. 
annuities.  Life  annuities,  both  upon  individual  lives 
and  upon  the  tontine  plan,i  are  old  favourites.  But 
as  forms  of  original  loans  they  are  giving  way  to  the 
perpetual  bonds.  Life  and  other  terminable  annui- 
ties have  the  advantage  of  affording  an  easy  means 
of  debt  payment ;  and  in  this  respect,  on  account  of 
the  accurate  knowledge  of  the  amount  to  be  paid, 
those  terminating  at  a  definite  time  are  the  preferable. 
But  inasmuch  as  the  annual  payments  must  be  larger 
than  the  interest  by  an  amount  calculated  to  equal 
the  principal  or  cost  at  the  termination  of  the  period, 
these  annuities  impose  a  heavier  constant  burden 
upon  the  taxes.  In  the  case  of  perpetual  bonds  no 
provision  is  obligatorily  made  for  amortisation,  and 
consequently  the  fiscal  officers  have  a  better  control 
over  the  expenditure  for  this  purpose.  At  a  time  of 
great  pressure  on  the  revenues  the  perpetual  bonds 
offer  a  better  means  of  raising  money  than  the  termi- 
nable  annuities,   inasmuch   as   they    will   impose    a 

1  This  plan,  now  made  familiar  again  by  its  adaptation  to  life- 
insurance  business,  is  to  make  over  in  succession  to  tlie  surviving 
members  of  a  group  of  annuitants  the  shares  of  the  members  who 
die.  The  last  survivor  gets  the  whole  amount,  until  his  death  closes 
the  account. 


CHAP.  II  FORMS   OF  PUBLIC  DEBTS  395 

smaller  burden  for  the  time  being.  But  when  the 
difficulty  is  over,  it  is  not  infrequently  the  practice 
to  turn  some  portion  of  the  debt  into  the  form  of 
terminable  annuities,  as  that  imposes  upon  future 
officials  a  fixed  policy  of  debt  payment.  The  invest  - 
ing  public  finds  little  or  no  absolute  advantage  in 
this  form,  for  it  is  relatively  hard  to  save  up  the 
principal  again,  coming  as  it  does  in  driblets,  and  the 
salable  value  of  the  security  decreases  continually, 
so  that  the  command  over  the  remaining  portion  of 
the  principal  is  never  good. 

Sec.  6.  Another  favourite  European  form  is  that 
of  lottery  loans.  A  somewhat  lower  rate  of  interest 
on  the  loan  is  offered  than  would  other- 

Lottery  loans. 

wise  be  accepted,  and  the  balance  of  the 
amount  is  divided  among  the  holders  of  the  secur- 
ities on  the  lottery  plan.  Inasmuch  as  this  is  in- 
tended to  appeal  to  the  general  love  of  gambling, 
the  bonds  are  for  small  amounts,  and-  are  sold  to  the 
people.  The  plans  for  determining  the  disposition 
of  the  winnings  of  the  lottery  are  varied.  A  com- 
bination of  the  annuity  loan  with  the  lottery  loan  is 
made  when  the  State  agrees  to  pay  a  certain  pro- 
portion of  the  debt  each  year,  the  determination  of 
which  portion  of  the  debt,  or  of  which  particular 
bonds,  will  be  paid  being  made  by  drawings. 

Sec.  7.  In  all  of  these  forms  of  debt-making  the 
chief  problem  of  the  practical  financier  is  to  fix  the 
rate  of  interest  as  near  as  possible  to  the  market 
rate.     It  is  best  that  it  should  not  be  below  the 


396        INTRODUCTION  TO  PUBLIC  FINANCE    part  m 

market  rate,  for  in  that  case  the  bonds  will  sell  foi 
Fixing  the  l^ss  than  par,  and  the  government  will 
rau  of  interest,  have  to  pay  back  a  larger  sum  than  it 
receives.  This  addition  is  accumulated  and  com- 
pounded interest,  which  it  is  presumably  easier  to 
pay  in  annual  instalments  than  at  one  time.  The 
amount  of  the  discount  at  which  such  bonds  will  sell 
depends,  in  part,  on  the  length  of  time  that  they 
have  to  run. 

When  the  market  rate  of  interest  falls,  as  it  gen- 
erally does  in  time  of  peace,  below  that  at  which  the 
debt  was  contracted,  it  is  generally  desirable  to 
reduce  the  rate  of  interest  on  the  debt.  If,  there- 
fore, the  government  can  call  in  its  bonds,  it  goes 
through  the  process  of  refunding;  that  is,  it  issues 
new  bonds  at  the  new  rate  of  interest,  and  pays  off 
the  old  ones  with  the  proceeds.  This  advantage  is 
peculiar  to  the  perpetual  bonds,  and  is  consequently 
made  use  of  whenever  the  rate  of  interest  falls, 
which  fact  can  be  ascertained  from  the  quotations 
of  the  bonds  on  the  stock  market. 

Sec.  8.  Perhaps  next  in  importance  to  the  great 
categories  of  debts  we  have  been  discussing  are 
Debts  of  the  thosc  included  in  the  classification  as 
treasury.  bascd  upou  Specified  revenues  (II.  A.  2). 

Of  these,  only  those  based  upon  the  revenues  of  a 
definite  period  are  common  in  national  financiering. 
Most  of  the  others,  however,  are  common  in  local 
and  municipal  finances.  Inasmuch  as  many  taxes 
are  payable  only  at  certain  times  of  the  year,  gener- 


CHAP.  II  FORMS   OF  PUBLIC  DEBTS  397 

ally  only  once  or  twice,  while  the  expenses  run  on 
through  the  whole  year,  there  may  be  times  when 
the  treasury  owes  more  than  it  has  on  haM.  Some 
of  these  debts  will  be  bills  of  account ;  others  will 
be  represented  by  notes  of  various  kinds  which  the 
treasurer  uses  to  pa}^  bills  with  or  discounts  to  ob- 
tain money.  The  latter,  called  "exchequer  bills," 
"  treasury  notes,"  and  the  like,  are  generally  willingly 
accepted,  and  often  pass  freely  from  hand  to  hand. 
They  usually  bear  interest  at  the  lowest  market  rate.^ 
They  are  properly  regarded  as  debts  of  the  treasury 
rather  than  debts  of  the  government,  and  are  pay- 
able out  of  the  next  incoming  revenues.  These  bills 
may  swell  to  large  amounts  in  times  of  sudden  press- 
ure on  the  finances,  or  they  may  be  carelessly 
allowed  to  accumulate  year  by  year,  until  they  must 
be  funded,  or,  perhaps,  included  in  some  general 
refunding  or  consolidation  act. 

In  some  cases,  governments  pay  their  debts  or  pay 
public  salaries  by  "  warrants  "  drawn-  upon  the  treas- 
ury at  a  time  when  the  treasury  is  empty.  The 
recipient  of  the  warrant  has  one  of  two  options: 
(1)  he  may  wait  until  the  treasury  is  refilled  by  the 
collection  of  the  taxes ;  or  (2)  he  may  discount  his 
warrant  by  selling  it  to  some  banker  or  broker,  who 
presents  it  in  due  course.  Not  infrequently  the 
"shaving  of  warrants,"  as  this  form  of  discounting 
is   called,  develops  serious  abuses.       In    any  event, 

1  In  1894-1895  English  exchequer  bills  for  March  bore  interest 
at  the  rate  of  1^  and  1  per  cent ;  June  bills,  2|  and  \\  per  cent. 


398        INTRODUCTION   TO  PUBLIC  FINANCE    part  m 

throwing  tlie  cost  of  waiting  upon  the  claimant  is  an 
ftbuse,  and  constitutes  a  tacit  repudiation  of  the 
agreement  with  the  chiimant. 

Sec.  9.  Borrowing  to  secure  the  means  for  enter- 
ing upon  some  productive  enterprise  is  the  chief 
Productive  causc  of  the  debts  of  the  several  States 
loans.  comprising   federal   States  and  of   local 

governments.  Cities  borrow  to  build  waterworks,  to 
construct  street  railroads,  to  establish  a  gas  or  light- 
ing plant,  etc.  In  the  United  States  the  different 
commonwealths  have  borrowed  to  aid  in  the  con- 
struction of  railroads  or  to  establish  banks.  The 
enterprise  in  which  the  funds  thus  acquired  are 
invested  furnishes  an  additional  security  for  the 
loan,  and  enhances  the  credit  of  the  local  body, 
because  it  is  supposed  that  the  enterprise  itself  will 
yield  the  interest  and  other  debt  charges.  There 
are  two  ways  of  managing  such  enterprises.  One 
is  by  selling  the  commodity  or  service  produced ;  the 
other  is  by  the  assessment  of  a  fee  upon  the  users. 
So  far  as  the  debt  is  concerned  there  is  little  differ- 
ence in  these  two  methods.  The  former,  however, 
introduces  a  speculative  element,  while  the  latter  is 
more  regular  in  its  returns.  Sometimes  such  enter- 
prises fail,  and  the  interest  has  to  be  paid  out  of  the 
revenue  from  taxation.  Not  infrequently  debts  of  this 
same  kind  are  made  to  render  assistance  to  private 
companies,  and  the  expectation  is  that  the  companies 
will  meet  the  interest  charges.  The  bulk  of  local 
debts  the  world  over  are  of  this  general  character. 


CHAP.  II  FORMS   OF  PUBLIC  DEBTS  399 

National  governments,  too,  have  sometimes  con- 
tracted debts  of  this  sort.  Thus  Prussia's  debt  was 
almost  all  incurred  for  the  purchase  of  National"in' 
railroads,  which  pay  the  interest  and  vested"  debts. 
provide  for  the  sinking  fund.  Other  countries  of 
Europe  have  similar  "  invested  "  debts.  The  United 
States  has  given  aid  to  railroads,  but  on  terms  that 
give  no  real  surety  that  the  debt  charges  will  ever 
be  met  by  the  roads.  The  wisdom  of  such  loans 
depends  solely  on  the  wisdom  of  entering  upon  such 
enterprises.  It  may  even  be  wise  under  certain  cir- 
cumstances to  advance  money  borrowed  in  this  way 
to  private  companies  which  promise  to  provide  some 
much-needed  facilities,  even  without  any  hope  that 
the  interest  and  debt  charges  will  be  met  in  any 
other  way  than  by  taxation.  That  such  debts  when 
contracted  should  be  treated  in  the  same  manner  as 
any  other  debts,  and  paid  as  soon  as  possible,  is  a 
matter  of  good  business  management.  The  failure 
of  the  assisted  private  enterprise  to  make  good  the 
sums  expended  is  no  reason  for  the  refusal  of  the 
government  to  meet  the  obligations  thus  incurred, 
and  refusal  under  such  circumstances  is  as  destruc- 
tive of  credit  as  would  be  the  failure  to  meet  any 
other  obligation. 

The  nature  of  all  the  remaining  forms  of  debt  is 
clear  from  their  names  in  the  table.  A  good  many 
of  them  are  merely  formal  in  character  and  are  in- 
curred in  carrying  out  some  of  the  regular' processes 
of  business  or  law.     Such  debts  are  never  included 


400         INTRODUCTION   TO  PUBLIC  FINANCE    part  iii 

in  the  sum  total  of  the  burden  of  debt,  because  the 
sums  out  of  which  they  are  to  be  met  are  received 
when  the  debt  is  contracted  and  retained  until  the 
debt  is  due.  They  are  never,  except  in  the  case  of 
the  grossest  mismanagement,  a  burden  on  the  reve- 
nues. 

These  diiferent  forms  of  debts  are  all  in  constant 
use,  and  the  indebtedness  of  any  nation  will  show 
A  system  of  almost  all  of  them.  The  experience  of 
public  debts,  ^i^q  niost  advanced  nation  shows  that 
there  is  as  much  need  of  a  systematic  arrangement 
of  the  different  forms  of  debts  as  there  is  of  the  dif- 
ferent forms  of  taxes.  The  various  kinds  of  stocks 
are  adapted  to  the  differing  needs  of  the  treasury 
and  the  tastes  of  the  lenders.  The  former  must  be 
consulted,  perforce;  the  latter,  if  it  is  desired  to 
obtain  the  most  favourable  terms  ;  hence  the  scope 
for  the  exercise  of  good  judgment  on  the  part  of  the 
fiscal  officers  in  the  choice  of  forms. 


CHAPTER   III 

NEGOTIATION,  PAYMENT  OF  INTEREST,  CONVERSION, 
AND   REDEMPTION   OF   DEBT 

Section  1.  There  are  practically  two  methods  for 
the  negotiation  of  a  public  loan.  One  is  to  prepare 
the  bonds  or  other  evidences  of  debt  for 

Two  methods 

sale,  fixing  all  the  conditions  and  offer-  of  negotiating 
ing  them  to  all  comers  who  will  accept  "^^"^• 
those  conditions.  The  other  is  to  determine  the 
amount  to  be  raised,  and  then  to  negotiate  with 
bankers  or  capitalists  or  other  persons  in  order  to 
ascertain  on  what  terms  the  sum  can  be  raised. 
There  are,  of  course,  many  variations  of  these  plans, 
but  these  are  the  principal  ones.  In  the  first  case 
the  State  loses  in  a  measure  the  advantage  of  com- 
petition between  the  lenders.  One  of  the  best 
examples  of  this  method  is  the  so-called  "popular 
subscription."  For  example,  a  State  decides  to  issue 
a  certain  number  of  bonds  at  a  fixed  rate  of  interest, 
selling  them  to  all  comers  at  a  stated  price.  Cer- 
tain places  are  designated  for  the  reception  of  sub- 
scriptions. If  the  terms  offered  are  too  low,  i.e. 
offer  too  little  advantage  to  the  purchasers,  it  may 
be  that  only  a  part  of  the  loan  will  be  taken  up.  If 
they  are  too  high,  the  State,  of  course,  suffers  a  loss. 
2d  401 


402        IXTRODUCTION  TO  PUBLIC  FINANCE    part 


III 


In  this  case  everything  depends  on  the  ability  of  the 
fiscal  officers  to  gauge  the  market.  This  task  is 
comparatively  easy  if  the  State  already  has  a  large 
number  of  stocks  outstanding,  the  market  price  of 
which  will  roughly  indicate  the  possible  rate  of 
interest  that  will  be  accepted  on  a  public  loan.  But 
the  extent  to  which  the  new  loan  will  probably  de- 
press the  market  will  have  to  be  considered. 

If  the  second  method  be  the  one  chosen,  the  State 
lets  it  be  known  that  bids  for  a  certain  sum  are 
desired.  The  bankers  and  capitalists,  and  sometimes 
the  public  at  large,  then  compete  for  the  privilege  of 
taking  either  the  whole  issue  or  a  part  of  it.  The 
different  bankers  offer  to  provide  the  whole  or  a  part 
of  the  money  needed  at  a  certain  rate  of  interest,  or 
if  the  face  of  the  bonds  and  the  rate  of  interest  have 
been  fixed,  offer  to  buy  the  stocks  at  a  certain  rate, 
generally  quoted  as  so  much  per  hundred.  The  most 
favourable  terms  offered  by  reliable  bidders  are  then 
accepted,  and  they  deliver  the  money  in  mass  or  in 
instalments  to  the  treasury,  in  such  form  as  may  have 
been  agreed  upon,  receiving  in  return  the  securities, 
which  they  are  then  at  liberty  to  dispose  of  as  they 
see  fit.  If  the  market  price  rises,  the  gain  goes  to 
the  capitalists  ;  if  it  falls,  they  lose.  Of  course  the 
suras  needed  often  exceed  the  wealth  of  any  one 
person  or  group  of  persons,  and  each  purchaser  has 
to  depend  on  his  ability  to  dispose  of  the  securities 
to  raise  the  money  to  meet  his  agreement. 

In  both  of  these  cases  various  secondary  considera- 


CHAP.  Ill  PAYMENT  OF  INTEREST  403 

tions  as  to  the  form  of  the  loan,  the  length  of  time 
it  has  to  run,  etc.,  affect  the  result.  Sometimes  it 
has  been  deemed  wise  to  combine  the  two  methods. 
That  is,  to  negotiate  with  the  bankers  for  terms  on 
a  part  of  the  debt,  and  then  to  offer  another  part  on 
similar  terms  to  popular  subscription,  or  even  to 
allow  of  more  general  competition  as  to  the  terms. 

Sec.  2.     The  amount  of  the  interest  or  the  rate  is 
the  chief  factor  in  the  negotiation  of  a  debt ;  but  the 
place  and  times  of  payment  and  the  kind  pi^ce  of  pay- 
of  money  in  which  payment  will  be  made  ^ento/inter- 

.  ,  .  „  -Til       ^^^>  ^'"'^  minor 

are  minor  considerations  or  considerable  considera- 
weight.  So,  also,  is  the  size  of  the  bonds.  '**'"*• 
In  the  case  of  popular  loans  which  are  intended  to 
be  subscribed  for  by  the  mass  of  the  people,  the 
bonds  must  be  for  small  amounts ;  in  other  cases  the 
units  may  be  larger.  There  is  no  uniformity  in  this 
matter.  The  larger  the  bonds  can  be  made,  the 
easier  it  is  for  the  treasury  to  manage  the  debt.  Of 
some  importance,  too,  is  the  choice  between  bonds 
that  are  payable  to  the  holder,  or  to  certain  persons 
by  name,  and  those  payable  to  persons  registered  on 
the  books  of  the  State.  If  the  bonds  are  payable  to 
the  holder,  there  is  no  need  of  a  record  of  the  holders 
by  the  government.  The  government  is  also  spared 
the  trouble  and  expense  of  recording  changes  in 
ownership.  But  there  is  an  advantage  of  greater 
safety  to  the  holders  in  the  case  of  the  recorded 
bonds,  which  are  thus  insured  against  loss  or  theft. 
It  is  in  general  customary  to  determine  the  place 


404         INTRODUCTION  TO  PUBLIC  FINANCE    part  hi 

at  which  the  interest,  etc.,  will  be  paid.  This  is 
frequently  some  important  commercial  centre,  some- 
o         ,  .        times  the  treasury  of   the  State.     If    in 

Payment  xn  -J 

some  commer-  the  couutry  issuing  the  bonds  there  be 
in  circulation  a  debased,  redundant,  or 
depreciating  currency,  it  is  often  agreed  to  pay  the 
interest  in  some  foreign  commercial  centre,  or  in 
foreign  money,  in  order  to  secure  payment  in  a  stable 
currency.  Thus  many  of  the  commonwealths  of  the 
United  States  which  contracted  debts  between  1830 
and  1850  agreed  to  pay  the  interest  in  London  in 
order  to  insure  the  payment  in  gold,  and  to  guard 
their  creditors  against  loss  from  the  depreciated  cur- 
rency then  in  circulation.  When  the  States  appealed 
to  Congress  for  assistance  in  the  payment  of  their 
debts  in  1842,^  this  was  alleged  as  a  feature  involving 
special  hardship.  A  large  part  of  Russia's  debt  is 
payable  in  Holland  and  England,  and  in  all  of  it  the 
kind  of  money  is  specified.  The  same  is  true  of  the 
debts  of  many  other  countries. 

Sec.  3.  While  it  is  often  necessary,  in  order  to 
obtain  the  required  funds  on  the  best  terms,  to  oifer 
Conversion  of  many  different  forms  of  public  securities, 
the  debt.  jqj^  [j^  ^  time  of  abscucc  of  pressure  it 

may  become  desirable  to  simplify  these  forms  and 
to  consolidate  the  debt.  This  involves  the  calling 
in  of  the  outstanding  paper  and  its  conversion  into 

1  See  Johnson,  Beport  on  the  Belief  of  the  States,  27th  Con.,  3d 
Sess.,  House,  No.  296;  a  perfect  mine  of  information  on  the  his- 
tory of  public  debts  in  the  United  States  up  to  1842. 


CHAP.  Ill  CONVERSION  405 

another  form.  Conversion  is  generally  undertaken 
when  a  fall  in  the  rate  of  interest  offers  the  State  an 
opportunity  to  gain  by  the  process.  The  reduction 
of  the  rate  of  interest  is  possible  whenever  the  State 
enjoys  the  privilege  of  repayment.  It  can  then  offer 
the  creditor  the  choice  of  payment  (for  which  it 
could  obtain  the  money  by  the  sale  of  new  bonds  at 
the  new  rate  of  interest)  or  of  new  securities  at  the 
lower  rate.  This  mode  of  conversion  or  reduction  of 
interest  is,  of  course,  perfectly  legitimate.  The  re- 
duction of  the  rate  arbitrarily  without  the  consent  of 
the  creditors  is  as  much  repudiation  as  the  refusal  to 
pay  altogether.  It  is  by  numerous  conversions  and 
consolidations  that  the  rate  of  interest  on  the  bulk  of 
the  debt  of  Great  Britain  has  been  reduced  as  low  as 
2|  per  cent. 

Sec.  4.  The  best  justification  of  debt-making  is 
that  it  distributes  the  burden  of  some  heavy  expenses 
upon  a  later  period.  The  cost  of  this  postponement 
is  the  payment  of  the  annual  interest.  In  order  to 
fulfil  the  intention  of  the  loan  and  to  Debts  must 
get  rid  of  the  cost  of  the  process,  it  is  ^^  P"*<^- 
necessary  to  pay  the  debt.  If  these  two  reasons  were 
not  sufficient,  the  danger  of  the  recurrence  of  similar 
extraordinary  needs  and  new  appeals  to  credit,  and 
the  eventual  danger  of  bankruptcy,  point  in  the  same 
direction.  As  we  have  already  seen,  some  of  the 
forms  of  debts  contain  within  themselves  the  provi- 
sion for  payment.  Life  and  terminable  annuities 
involve  the  payment  of  the  principal  in  annual  instal- 


406         INTRODUCTION   TO  PUBLIC  FINANCE    part  hi 

meuts.  Other  forms  call  for  payment  in  larger  in- 
stalments or  at  a  definite  termin,  for  which  provision 
must  be  made  by  the  collection  of  funds  beforehand. 
If,  however,  the  expiration  of  the  period  finds  the 
debtor  State  not  in  the  possession  of  the  funds  needed, 
it  may  have  to  borrow  again  to  fulfil  its  agreements. 
In  the  case  of  most  perpetual  debts  it  would  be 
obviously  unfair  to  call  upon  certain  holders  for  the 
surrender  of  their  bonds  and  to  allow  other  holders 
of  the  same  sort  of  bonds  to  retain  theirs,  especially 
if  the  rate  of  redemption  is  below  the  market  rate. 
The  whole  of  any  issue  of  bonds,  therefore,  must  be 
treated  as  a  unit.  This  involves  the  gradual  accumu- 
lation of  a  fund  for  the  payment  of  all  of  the  debt  of 
the  same  kind  and  issue.  There  is,  however,  another 
alternative.  The  government  may  enter  the  market 
with  this  fund,  before  it  is  large  enough  to  pay  all 
the  debt,  and  purchase  such  of  its  securities  as  are 
offered  for  sale.  Care  must  be  exercised  in  the  ap- 
plication of  this  method  not  to  raise  the  price  of  the 
securities.  In  some  cases  arrangements  are  made 
in  advance  for  calling  a  portion  of  the  outstanding 
bonds  by  lot.  This  depreciates  the  whole  issue,  be- 
cause each  bond  is  liable  to  be  called. 

Provision  made  for  the  accumulation  of  a  fund 
The  sinking  fo^  the  redemption  of  the  debt  is  called 
fund.  ^jjg  sinkingfund.i   The  sinking  fund  may 

be  defined  in  two  ways ;  either  it  is  an  annual  fund, 

1  See  Ross,  "Sinking  Funds,"  Pub.  Amer.  Economic  Assoc, 
Vol.  VII.,  p.  445. 


CHAP.  Ill  REDEMPTION  OF  DEBT  407 

i.e.  a  portion  of  the  annual  income,  or  it  is  the 
accumulated  capital  from  this  and  other  sources 
applicable  to  the  payment  of  the  debt.  Not  strictly 
the  earliest,  but  the  first  important,  attempt  at  the 
arrangement  of  a  regular  sinking  fund  is  that  of 
England  in  1786  under  Pitt.  This  was  a  remark- 
able scheme.  It  is  said  to  have  been  suggested  by 
Price,  a  clergyman,  who  in  1772  wrote  An  Appeal 
to  the  Public  on  the  Subject  of  the  National  Debt. 
His  argument  was  based  on  the  productiveness  of 
compound  interest.  He  urged  that  a  fixed  sum, 
however  small,  should  be  set  aside  every  year  for 
the  purchase  of  public  stock,  and  that  the  interest 
on  the  stock  thus  purchased  should  continue  and 
should  be  applied  to  further  purchases.  There 
would  then  be  two  sources  from  which  the  debt 
would  be  cancelled  :  one,  the  payment  of  the  annual 
amount ;  the  other,  the  ever  increasing  interest  fund. 
The  effect  of  such  a  scheme  in  eventually  discharg- 
ing any  debt  was  regarded  as  almost  magical.^  It 
was  not  perceived  that  the  real  efficacy  of  the  scheme 
lay  in  the  fact  that  the  nation  continued  to  bear  the 
whole  burden  of  the  initial  interest  charge  until  the 
debt  was  paid,  and  that  the  real  source  of  payment 
was  the  excess  of  taxation  over  expen-  put's  sinking 
diture.  In  accord  with  this  idea  Pitt  Z"^'^- 
appointed  a  "  Board  of  Commissioners  of  the  Sink- 

1  As  an  illustration,  compute  the  sum  which  a  penny  placed 
at  interest  in  the  time  of  Christ  would  amount  to  at  compound 
interest. 


408         INTRODUCTION   TO  PUBLIC   FINANCE    part  iu 

ing  Faiid,"  who  were  to  receive  a  fixed  sum  each 
year,  with  which  to  purchase  public  stocks,  at  or 
below  par.  Interest  on  the  stocks  thus  purchased 
was  to  be  paid  to  the  commissioners,  and  quarterly 
applied  to  new  purchases.  This  much-admired 
scheme  amounted  to  adding  £1,000,000  annually 
to  the  taxes  needed  for  other  purposes,  and  con- 
tinuing the  entire  burden  of  taxation  until  the 
debt  was  paid.  It  is  clear  that  what  was  really 
used  for  debt  payment  was  the  surplus  revenue. 
The  £1,000,000  was  clearly  that,  and  the  interest 
on  the  stocks  purchased  therewith  need  not  have 
been  paid  but  for  the  sinking  fund.  There  is,  in- 
deed, no  source  from  which  the  debt  can  be  paid 
but  taxation  or  similar  net  revenue.  So  great  was 
the  faith  of  the  government  in  this  scheme  that  it 
continued  the  payments  to  the  sinking  fund  even 
while  borrowing  for  the  war  of  1793  and  after. 
The  fallacy  of  Dr.  Price's  arguments  was  pointed  out 
by  Professor  Robert  Hamilton  of  Aberdeen  in  1813. 
Shortly  after  that,  it  was  estimated  that,  as  a  result 
of  the  sinking  fund  system  kept  up  during  a  period 
of  borrowing,  the  government  had,  between  1785  to 
1829,  borrowed  £330,000,000  at  5  per  cent  to  pay 
a  debt  of  the  same  size  at  \\  per  cent.  The  scheme 
was  then  abandoned,  never  to  be  resumed.  From 
this  time  on  only  genuine  surpluses  were  applied 
to  the  payment  of  the  debt.  This  abandonment 
of  the  idea  of  Price  and  Pitt,  however,  had  a  rather 
disastrous  result,  in  that  it  largely  suspended  debt 


CHAP.  Ill  SINKING  FUNDS  409 

payment  in  favour  of  tax  remission.  Since  1875 
England  has  tried  a  new  plan.  Without  commit- 
ting herself  to  a  policy  which  would  involve  paying 
debts  with  one  hand  and  borrowing  with  the  other, 
and  without  relying  upon  mere  chance  The  new  sink- 
surpluses,  she  decided  to  appropriate  a  '^''ngfund. 
fixed  sum  from  the  consolidated  fund  for  the  national 
debt  services,  to  be  continued  as  long  as  there  were 
no  extraordinary  calls  upon  the  funds.  In  1895 
£25,000,000  was  the  fixed  charge  for  the  national 
debt  services,  of  which  X  1,718,263  Ss.  7c?.  went  into 
the  new  sinking  fund  ;  whereas  in  1875  the  sum  was 
fixed  at  £28,000,000,  and  a  larger  amount  went  into 
the  sinking  fund.  During  the  Boer  War  and  for  a 
time  thereafter  the  sinking  fund  was  suspended. 
Thus  in  1901-1902  the  "national  debt  services" 
stood  as  follows :  the  "  fixed  charge"  was  £23,000,000, 
less  £4,610,000,  "sinking  fund  suspended,"  leaving 
£18,360,000,  denominated  as  "  inside  the  fixed 
charge  "  ;  in  addition  to  this  there  was  £3,250,000  in- 
terest on  the  war  debt,  which  was  "  outside  the  fixed 
charge."  In  addition  to  this  England  has  been  con- 
verting her  debt  into  terminable  annuities,  resulting 
in  a  mechanical  method  of  debt  payment  which  may 
in  time  of  pressure  work  as  the  old  sinking  fund 
did. 

Sec.  5.  The  American  system  of  debt-paying  be- 
gan in  1790  with  the  application  of  a  surplus  from 
tunnage  fees  and  imports  to  the  purchase  of  public 
bonds  in  order  partly  to  improve  the  market  price 


410         INTRODUCTION   TO  PUBIIC  FINANCE    part  m 

of  the  bonds  and  by  thus  improving  the  country's 
credit  to  facilitate  conversion.     In  1792 

American  sys- 
tems of  debt       the  bonds  thus  purchased  were  made  the 

payment.  basis  of  a  sinking  fund,  it  being  deter- 

mined that  the  interest  on  them  should  continue  and  be 
paid  to  a  commission  for  the  further  purchase  of  public 
bonds.  In  1795  the  sinking  fund  commissioners 
were  made  the  recipients  of  certain  revenues  to  be 
applied  to  the  payment  of  definite  portions  of  the 
debt.  Ross  thus  summarises  this  fund  :  "  The  sink- 
ing fund  was  now  enlarged  by  the  following  addi- 
tional appropriations  :  (1)  so  much  of  the  permanent 
duties  as,  with  existing  income,  should  enable  the 
commissioners  to  pay,  in  1796  and  thereafter,  a 
yearly  2  per  cent  of  the  6  per  cent  stock ;  (2)  the 
surplus  dividends  on  the  government's  f  2,000,000  of 
United  States  Bank  stock  after  deducting  the  inter- 
est accruing  on  the  remnant  of  the  bank  loan  ;  (3)  so 
much  of  the  permanent  duties  as,  with  the  surplus 
dividehds,  should  suffice  to  pay  a  yearly  §200,000 
on  the  bank  loan,  till  1802,  and  then  begin  the  re- 
demption of  the  deferred  stock ;  (4)  the  proceeds  of 
the  sale  of  public  lands  ;  (5)  the  proceeds  of  debts 
inherited  from  the  old  government ;  (6)  all  revenue 
surpluses  of  any  year  remaining  unappropriated  dur- 
ing the  next  session  of  Congress."^  This  fund  was 
not  very  efficient  on  account  of  the  excess  of  expendi- 
tures. It  served  one  very  important  purpose,  how- 
ever, that  of  regulating  the  credit  of  the  United 
1  Sinking  Funds,  p.  49. 


CHAP.  Ill  REDEMPTION   OF  DEBT  4H 

States  by  showing  the  intention  to  pay.  In  1802 
Gallatin  organised  another  plan,  which  was  continued 
for  some  time.  It  was  to  increase  the  revenues 
beyond  the  current  expenditures  and  apply  the 
surpluses  to  the  debt  payment.  The  results  of  the 
two  plans  have  been  compared  as  follows :  "  The 
inherited  debt  and  accrued  interest  amounted  in 
1791,  when  funded,  to  $76,781,953.14.  The  Feder- 
alists in  ten  years  reduced  this  to  $72,733,599,  but 
added  $7,193,400  of  new  stock,  mostly  at  8  per 
cent,  thus  bequeathing  a  burden  of  $79,926,999  to 
their  successors.  Of  this,  Gallatin's  sinking  fund 
extinguished  $46,022,810  between  1801  and  1811. 
The  purchase  of  Louisiana,  however,  added  $11,250,- 
000  to  the  principal,  so  that  on  January  1,  1812,  the 
public  debt  was  $45,154,189,  over  thirty-one  mill- 
ions less  than  the  original  Revolutionary  debt."^ 
This  comparison  is  not  altogether  fair  to  Hamilton, 
the  author  of  the  older  plan,  for  his  fund  enabled 
important  conversions  to  be  successfully  made  which 
reduced  the  debt  charges.  During  the  War  of  1812 
the  payments  to  the  sinking  fund  were  suspended. 
After  the  war  the  debt  stood : 


Old  debt  remaining .  .  •.  .    $39,905,183.66 

Funded  war  debt      ....       49,780,322.13 
Treasury  notes  ....       18,452,800.00 

Temporary  loans      .  .  .  550,900.00 

Total  burden  on  the  sinking  fund       %  108,689,205.79 

1  Ross,  p.  67. 


412         INTRODUCTION  TO  PUBLIC  FINANCE    part  iil 

The  sinking  fund  was  at  that  time  composed  of 

Interest  on  stock  held  by  coin.       .            .  $1,969,577.64 

Receipts  from  public  lands             .            .  800,000.00 

From  duties 5,230,422.36 

Sinking-fund             .            .            .  $8,000,000,001 

The  policy  of  protection,  inaugurated  after  the  War 
of  1812,  separated  income  from  expenditure.  The 
ultimate  purpose  of  most  of  the  taxation,  namely 
protection,  was  considered  so  paramount  that  a  high 
rate  of  taxation  was  continued  for  that  reason.  The 
available  surpluses  were,  therefore,  large,  and  were 
from  time  to  time  applied  to  the  debt.  Down  to 
1824,  when  all  the  debt  contracted  up  to  that  time 
was  practically  paid,  the  sinking  fund  was  managed 
by  a  special  commission,  but  since  then  the  Secretary 
of  the  Treasury  has  had  charge  of  it.  The  Civil  War 
debt  was  by  the  act  of  February  25,  1862,  sup- 
Sinkingfund  poscdly  placed  on  a  secure  basis.  "  The 
of  the  Civil  '  coiu  paid  for  duties  on  imports  was  to  be 
applied  first  to  the  payment  of  interest 
on  the  bonds  and  notes  of  the  United  States.  It 
was  then  to  be  applied  '  to  the  purchase  or  payment 
of  1  per  cent  of  the  entire  debt  ...  to  be  made 
within  each  fiscal  year,  which  is  to  be  set  apart  as 
a  sinking  fund,  and  the  interest  of  which  shall  in 
like  manner  be  applied.'  .  .  .  The  residue  of  cus- 
toms receipts  was  to  be  paid  into  the  treasury."  ^ 
While  no  such  regularity  as  was  contemplated  by 

i  Ross,  p.  69,  from  Finance,  Vol.  II.,  p.  916. 
2  Ross,  p.  79. 


CHAP.  Ill  REDEMPTION  OF  DEBT  413 

this  act  was  realised,  yet  the  debt  has  been  paid 
from  surpluses  more  rapidly  than  was  anticipated, 
until  the  reduction  of  the  revenues  in  1895,  due  to 
a  change  in  the  policy  in  regard  to  the  protective 
duties,  together  with  a  redundancy  in  the  monetary 
circulation,  which  resulted  in  a  foreign  drain  upon 
the  gold  reserves  held  for  the  redemption  of  notes 
outstanding,  made  new  borrowing  necessary.  The 
war  with  Spain  involved  a  new  increase  of  indebted- 
ness, which,  however,  was  contracted  on  terms  re- 
markably favourable  to  the  government.  The  same 
general  policy  of  debt  reduction  has  continued,  and 
the  debt,  which  amounted  to  11,108,000,000  in  1900, 
was  by  1908  reduced  to  1938,000,000. 

The  commonwealth  constitutions  of  the  United 
States  very  generally  impose  upon  the  legislatures 
the  duty  of  providing  a  sinking  fund.  Many  of 
them,  besides  limiting  the  amount  of  q^^^^^, 
debt  that  may  be  created,  either  by  wealth  sink- 
naming  a  fixed  sum  or  a  fixed  propor-  *^s'-/^^  *• 
tion  of  the  revenues  that  may  be  used  for  interest 
payment,  also  provide  that  whenever  a  debt  shall 
be  contracted,  a  tax  shall  at  the  same  time  be  levied 
sufficiently  large  to  pay  the  interest  charge  and 
provide  a  sinking  fund.  The  general  distrust  of 
the  legislatures  is  emphasised  in  the  constitutions 
by  making  such  laws  irrepealable  until  the  debt 
is  paid.  The  commonwealths  are  thus  permanently 
committed  to  the  policy  of  debt  payment,  not  so 
much  on  account  of  any  deep-seated  belief  in  the 


414         INTRODUCTION  TO  PUBLIC  FINANCE    part  hi 

efficacy  of  the  particular  methods  laid  down,  which 
may  necessitate  the  continuance  of  debt  payment 
even  at  a  time  of  borrowing,  but  on  account  of  the 
widespread  distrust  of  the  prudence  of  the  legisla- 
tures. The  same  distrust  has  destroyed  the  danger 
of  the  system,  by  almost  entirely  forbidding  debt- 
making  by  the  commonwealths.^ 

Sec.  6.  In  conclusion,  it  would  seem  that  the 
experience  of  great  nations  shows  :  that  debts  must 
be  paid ;  that  they  can  be  paid  only  by  increased 
taxation  ;  and  that  the  possible  weight  of  taxation 
for  this  purpose  is  determined  by  a  consideration 
(1)  of  the  length  of  time  it  is  thought  desirable 
that  the  debt  shall  run,  (2)  of  the  existing  burden 
of  taxation,  (3)  of  the  general  conditions  of  the 
people.  When  the  debt  has  been  contracted  for 
some  productive  purpose,  it  seems  fitting  that  the 
surplus  earnings  of  such  an  enterprise  should  go  to 
debt  payment,  as  this  eventually  enables  a  perma- 
nent lowering  of  the  cost  of  such  services  to  the 
people. 

1  For  a  full  account  of  the  debt  policy  of  the  American  common- 
wealths see  my  monograph,  I)as  Kreditwesen  der  Staaten  und 
Stddte  der  Nordamerkanischen  Union  in  seiner  historischen  Ent- 
wickelung^  Jena,  1891. 


PART   IV 

FINANCIAL  ADMINISTRATION 

CHAPTER  I 

THE  BUDGET;    ADMINISTRATION   OF   EXPENDITURE; 
CONTROL   AND   AUDIT 

Section  1.  To  the  fourth  and  last  part  of  our 
subject  belong  the  formal  arrangements  of  the  public 
finances,  —  the  preparation  and  ratification  of  the 
budget,  the  care  and  preservation  of  the  public 
funds,  the  administration  and  control  of  expendi- 
tures, and  the  collection  of  the  revenues.  It  was 
this  side  of  the  subject  that  first  attracted  attention 
and  which  occupied  a  large  part  of  the  writings  of 
the  cameralists.  Lorenz  von  Stein  gives  a  very 
considerable  portion  of  his  monumental  work  to 
these  subjects,  and  the  able  French  writer,  Stourm, 
has  devoted  to  financial  legislation  a  volume  entitled 
Le  Budget.  English  and  American  economists  have 
generally  left  this  field  to  the  jurists  and  publicists, 
but  Bastable  devotes  the  last  three  chapters  of  his 
book  to  some  of  these  topics. 

In    every    well-regulated    household    and    every 

415 


416         INTRODUCTION  TO  PUBLIC  FINANCE    part  iv 

business  concern  the  keeping  of  accurate  accounts, 
Theimpor-  the  distribution  of  the  funds  among 
tance  of  cor-      different   persons,   and   the    control    of 

rect  methods 

of  fiscal  ad-  cxpenscs  havc  an  importance  second 
ministration,  only  to  the  broadcr  questions  of  policy. 
Equally  important  in  the  greater  housekeeping  of 
the  State  are  the  formal  arrangements  for  the  enact- 
ment of  fiscal  laws,  for  the  keeping  of  accounts,  and 
for  insuring  compliance  with  the  laws. 

The  general  frame  of  the  fiscal  administration, 
the  relation  between  the  various  departments,  the 
assignment  of  particular  powers  and  duties  to  the 
different  officials  or  bodies,  depends  entirely  upon 
the  general  political  organisation.  How  these  fea- 
tures differ  from  country  to  country  it  is  the  prov- 
ince of  political  science  to  describe.  But  the  frame 
of  administration  has  an  effect  on  the  finances ;  and 
there  are  certain  principles  demanded  by  sound 
finance  which  are  followed  by  every  country,  no 
matter  what  its  frame  of  government. 

Sec.  2.  Of  necessity  the  methods  of  accounting 
and  control  do  not  assume  a  public  character  until 
History  of  Us-  t^®^®  i^  ^  pretty  clearly  recognised  popu- 
cai  adminis-  lar  interest  in  the  affairs  of  the  State. 
tration.  ^^  ^^^  time  the  Roman  treasury  under 

tlie  control  of  the  Censors  and  in  charge  of  the 
Qitcestors  exhibited  the  features  of  public  economy. 
But  under  the  Empire  the  public  treasury  and  the 
private  treasury  of  the  CsBsars  gradually  merged 
into  a  single   one,    and  the  methods  of  accounting 


CHAP.  I  THE  BUDGET  417 

became  that  of  private  rather  than  of  civic  house- 
keeping. 

The  middle  ages  were  essentially  unpolitical,  and 
in  that  period  no  system  of  public  treasuries  proper 
was  developed,  except  in  the  free  cities.  As  we 
have  already  seen,  there  were  no  revenues  collected 
in  the  monarchies  for  a  distinctly  public  purpose 
until  the  fifteenth  and  sixteenth  centuries,  and  con- 
sequently there  could  be  no  public  accounts  or  pub- 
lic control  over  the  funds. 

The  constant  struggle  between  the  representatives 
of  the  people  and  the  officers  of  the  older  abso- 
lute governments  for  the  control  of  the  ^     .. ,  ,     , 

o  Conflxct  devel- 

purse  led  to  the  development  of  distinct  ops  legislative 
methods  of  accounting  and  control.  The  ^^"'^^  • 
most  striking  feature  of  the  modern  systems  in 
European  countries  is  the  establishment  of  the  bud- 
get, and  of  the  right  of  the  popular  representatives 
to  vote  taxes  and  appropriations.  In  America  the 
right  of  the  legislatures  to  control  the  finances  was 
clearly  established  at  a  very  early  date,  and  little 
or  no  advance  has  been  made  beyond  the  crude 
methods  first  developed.  Most  European  countries 
have  advanced  more  rapidly  and  perfected  far  better 
systems.  This  higher  development  of  the  budget  in 
European  constitutional  governments  is  explained 
by  the  constant  conflict  between  the  branches  of  the 
government  having  interests  which  are  theoretically 
opposed.  The  modern  budget  is  an  outgrowth  of 
the  gradual. assumption  of  power  by  the  legislatures, 
2e 


418  INTRODUCTION  TO  PUBLIC  FINANCE     part  iv 

and  the  corresponding  loss  of  power  by  the  execu- 
tives.    The  latter  have   had  to  ask   for 

Europe  m 

advance  of  funds,  and  the  former  in  granting  them 
America.  have   insisted  upon  knowing  what  they 

are  to  be  used  for,  and  upon  having  assurance  that 
they  will  not  be  applied  in  any  other  way.  In  tha 
United  States,  however,  both  the  federal  and  tlie 
commonwealth  legislatures  suggest,  or  initiate,  finan- 
cial legislation  as  well  as  grant  funds.  Both  of  these 
functions  of  initiation  and  of  grant  being  in  the 
same  hands,  there  is  no  conflict  of  interests  such  as 
has  developed  the  systems  of  financial  statements 
and  legislative  control  in  Europe.  The  only  care  in 
this  country  is  to  see  that  the  funds  are  not  appro- 
priated to  private  purposes,  while  in  Europe  there  is 
the  desire  to  prevent  the  application  of  the  funds  to 
other  public  purposes  than  the  ones  specified. 

Sec.  3.  It  has  been  claimed  that  the  English  sys- 
tem served  as  a  model  for  the  other  European  coun- 
,,  , .  tries.     However  that  may  be,  and  it  is 

Making  up  -^  ' 

the  English       tvxxQ   Only    in   part,  the    English  system 
"^^  •  will  serve  as  a  good  illustration  of  the 

European  methods.  The  fiscal  year  begins  April  1 
and  ends  March  31.  Each  department  of  the  ad- 
ministration prepares  a  careful  statement,  known 
as  the  "estimates,"  for  the  coming  year.  These 
"estimates,"  each  of  which  comprises  a  good-sized 
quarto  volume,  are  tediously  exact  and  minute  in 
the  statement  of  what  it  is  expected  will  be  needed 
for    the    forthcoming   year.     They    are    called    the 


CHAP.  I  THE  BUDGET  419 

"  army  estimates,"  the  "  navy  estimates,"  the  "  civil 
service  estimates,"  etc.  The  Chancellor  The^'esti- 
of  the  Exchequer,  in  turn,  bases  his  ^a^es-" 
estimate  of  all  that  will  be  needed  upon  these 
statements,  and  calculates  the  receipts  from  each 
source  on  the  basis  of  the  revenues  of  the  previous 
year.  He  then  presents  all  the  documents  to  Parlia- 
ment with  a  brief,  clear  statement  of  what  the 
expenditure  will  be,  what  it  is  expected  the  reve- 
nues will  be,  what  new  taxes,  if  any,  are  needed, 
or  what  taxes  may  be  remitted  or  changed,  in  order 
to  make  the  revenues  equal  the  expenditure.  This 
statement  is  called  the  budget.  "  Usually,  but  by  no 
means  always,  the  proposals  of  the  Chancellor  of  the 
Exchequer  are  accepted  by  the  Commons,  and  even 
when  they  are  not  in  detail,  it  is  seldom  that  the 
items  of  expenditure  are  objected  to.  The  House  is 
supposed  to  go  through  the  'estimates'  in  detail; 
it  forms  itself  into  a  '  committee  of 
supply,'  and  sanctions  every  item  in  the 
three  bulky  volumes,  but  its  members  have  not,  as  a 
rule,  knowledge  enough  of  the  details  to  offer  effec- 
tive criticism,  and  the  utmost  the  committee  can  be 
said  to  do,  on  the  average,  is  to  render  flagrant 
abuses  impossible.  On  the  average,  perhaps  that  is 
enough."^  Parliament  cannot  directly  or  indirectly 
increase  the  appropriations  asked  by  the  ministry  in 
the  name  of  the  Crown,  nor  add  new  appropriations. 
The  estimates  both  of  revenues  and  expenditure  are 
1  Wilson,  Tlie  National  Budget,  p.  147. 


420         INTRODUCTION   TO  PUBUC  FINANCE    part  iv 

made  with  such  great  care  that  there  is  seldom  either 
a  surplus  or  a  deficit  of  any  large  amount  at  the  end 
of  the  year.  According  to  Bastable  the  estimates  of 
expenditure  in  England  for  the  three  years  April  1, 
1889,  to  March  31,  1892,  as  compared  with  the  re- 
sults, show  an  error  of  only  X  137,000  in  a  total  of 
£264,000,000,  or  a  little  over  Is.  per  XlOO,  or  $1  in 
Smaiinessof  §2000.  All  Credits  of  disbursing  offi- 
errors.  ggj-s   expire,   and   their    accounts   close, 

March  31.  All  appropriations  lapse  at  that  time, 
except  those  appropriated  for  the  consolidated  fund. 
It  requires  a  special  act  of  Parliament  to  spend 
any  more  money  on  last  year's  account,  even  though 
the  original  appropriation  may  not  have  been  ex- 
hausted. 

In  the  United  States  there  is  no  connection  be- 
tween the  executive  and  legislative  departments  of 
the  government  that  would  allow  of  any  such  ar- 
rangement as  that  of  the  budget  in  England.  The 
reports  of  the  administrative  officers,  the  President, 
and  the  Secretary  of  the  Treasury,  are  made  to  Con- 
gress and  are  often  accompanied  by  suggestions  of 
various  sorts.  But  the  executive  officers  have  no 
real  access  to  the  ear  of  the  House.  Therefore,  no 
Congressional  formal  budgct  is  presented  to  Congress. 
financiering,  ^wo  Separate  committccs  in  the  House 
(where  finance  bills  originate,  although  they  may  be 
amended  by  the  Senate)  deal  regularly  with  finances  ; 
one  with  taxation,  the  other  with  appropriations. 
These  committees  are  the  "  Committee  on  Ways  and 


CHAP.  1  THE  BUDGET  421 

Means"  and  the  "Committee  on  Appropriations." 
Bills  involving  expenditure  or  taxation  are  regu- 
larly referred  to  these  committees.  The  control  of 
these  committees  rests  solely  on  convention,  there 
being  no  constitutional  provision  for  such  reference. 
Even  after  the  committee  has  presented  an  appro- 
priation or  revenue  bill,  there  is  the  greatest  freedom 
of  amendment,  and  theoretically  any  member  of  the 
House  could,  if  so  inclined,  present  an  entire  new 
set  of  such  bills  forming  a  budget.  Appropriations 
may  be  increased  or  decreased,  or  new  ones  intro- 
duced, without  reference  to  the  committees.  Prac- 
tically the  control  of  these  committees  is  very  great, 
especially  in  the  matter  of  suppressing  appropria- 
tion bills  that  may  be  referred  to  them  for  considera- 
tion. Certain  lines  of  expenditure  may  be  suggested 
by  other  committees,  and  theoretically  may  be  voted 
on  without  reference  to  these  controlling  committees. 
For  example,  the  navy  and  war  departments  may 
receive  appropriations  suggested  by  the  committees 
in  charge  of  them.  Many  other  committees,  as, 
for  example,  the  ones  on  claims,  on  invalid  pensions, 
pensions,  etc.,  regularly  bring  in  bills  involving 
expenditure. 

Ever  since  the  protective  policy  was  fully  estab- 
lished the  United  States  government  has  been  in  the 
possession  of  large  revenues,  which*  are  Revenue  laws 

-,,.-,.  1  ,  sundered 

not  determined  m  any  way  by  the  ex-  jromavwo- 
penditures.     So  that  the  consideration  of  priations. 
revenue  bills  has  always  been  complicated  by  othei 


422    .     INTRODUCTION  TO  PUBLIC  FINANCE    part  n 

than  fiscal  considerations,  except  during  the  Civii 
War.  This  sundering  of  the  functions  of  spending 
and  of  obtaining  revenues,  and  the  general  scatter- 
ing of  appropriations,  would  apparently  cause  the 
utmost  confusion.  But  the  result  is  not  so  bad  as 
might  be  expected,  (1)  because  of  the  influence  of 
the  committees,  (2)  because,  of  course,  some  attempt 
is  made  by  the  House  itself  to  ascertain  whether 
funds  are  or  will  be  available  for  the  purposes  sug- 
gested, (3)  because  the  tax  system  has  not  been  a 
variable  one,  and  has  yielded  a  fairly  regular  and 
gradually  increasing  revenue,  to  spend  wiiich  has 
sometimes  taxed  to  the  utmost  the  ingenuity  of 
Congress.  But  the  system  absolutely  prevents  any 
systematic  oversight  of  the  finances  as  a  whole,  and 
allows  of  no  measurement  of  the  relative  weight 
of  each  appropriation.  Credits  to  spending  officers 
do  not  expire  at  the  end  of  the  fiscal  year,  July  1, 
as  in  England,  but  generally  continue  in  force  until 
the  entire  sum  is  consumed  or  the  object  is  accom- 
plished. Congress  thus  loses  one  advantage  for  the 
control  of  expenditure  that  Parliament  enjoys.  The 
American  system,  however,  has  one  great  advantage 
over  the  English  in  that  it  allows  of  a  more  critical 
investigation  by  the  legislature  of  the  specific  items 
of  each  appropriation. 

The  date  at  which  the  fiscal  year  expires  is  gen- 
ThefiscaZ  erally  set  with  reference  to  the  conven- 
year.  ieucc  of  officials  in  rendering  their  reports 

and   to    the  meetings  of  the  legislatures.     The  ac- 


CHAP,  f  CONTROL  AND  AUDIT  42^ 

counts  presented  are  generally  for  gross  income  and 
expenditure,  so  that  the  details  of  the  cost  of  col- 
lecting revenues  and  chance  savings  of  expenditures 
can  be  controlled. 

There  is  theoretically  no  sanction  for  expenditure 
of  any  kind  beyond  the  amount  appropriated  by  the 
legislature.  If  any  expenditure  not  so  Deficiency 
sanctioned  is  of  pressing  necessity,  the  ^^^*- 
administrative  officers  may  sometimes  assume  the 
responsibility  and  make  the  appropriation,  subject 
to  the  ratification  of  the  legislature  when  it  next 
meets.  This  discretionary  power  is  exercised  to  a 
very  limited  extent  in  most  countries.  In  the 
United  States,  however,  the  disorder  attendant  upon 
the  appropriations  involves  the  annual  presentation 
of  a  "deficiency  bill."  When  any  action  involving 
expenditure  has  been  sanctioned  by  the  legislature, 
and  insufticient  funds  have  been  appropriated,  there 
is  a  moral  obligation  resting  on  the  legislature  to 
make  the  requisite  appropriation  afterward. 

Sec.  4.  When  the  budget  has  been  prepared  and 
voted,  the  next  step  is  to  see  that  the  expenditure  is 
carried  out  as  authorised  and  to  prevent  English  con- 
any  misappropriation  of  the  funds.  In  ^^^^  ""^  ""^^^• 
England  the  funds  are  deposited  with  the  Bank  of 
England,  subject  to  the  order  of  the  comptroller  an  i 
auditor-general  only.  This  officer's  duties  are  a 
combination  of  those  of  the  old  board  of  audit  created 
by  Pitt  in  1785  with  those  of  the  Exchequer,  and 
date  from  1866.     No  payment  is  made  without  (1) 


424         INTRODUCTION   TO  PUBLIC   FINANCE    part  iv 

an  act  of  Parliament,  (2)  a  requisition  by  the 
treasury  ^  issued  to  the  comptroller-general,  (3)  a 
grant  of  credit  for  the  amount  authorised  by  the  act 
good  for  one  year,  (4)  a  treasury  order  directing  the 
transfer  of  the  money  to  the  paymaster-general  of 
the  service.^  As  the  estimates  have  been  closely 
scrutinised,  there  is  little  opportunity  for  the  mis- 
application of  funds.  There  is  none  whatever  for 
overdraft.  Again,  after  the  expenditure  has  been 
made,  the  accounts  with  vouchers  are  passed  through 
the  comptroller's  office  for  his  approval,  or  audit. 
The  report  of  that  officer  is  subjected  to  the  final  re- 
vision of  the  parliamentary  committee  of  public 
accounts.  Thus  the  whole  process  begins  and  ends 
with  Parliament.  It  will  be  seen  that  there  are 
really  two  parts  to  the  process.  First,  the  control 
over  the  "  issues  "  to  the  disbursing  officers,  that  is, 
over  the  placing  of  the  public  moneys  in  their  hands. 
Secondly,  the  audit  of  the  accounts  after  the  ex- 
penditures have  been  made. 

Sec.  5.  In  the  United  States  ^  the  direct  control 
of  the  money  is  in  the  hands  of  the  executive 
officers,  subject  to  the  statutes  of  Congress.  The 
safeguards  consist  in  making  the  processes  of  ex- 
penditure complicated  and  subjecting  each  item  to 
the  scrutiny  of   several   sets   of   executive   officers. 

1  See  Wilson,  The,  State,  pp.  696-698. 

2  Cf.  Bastable,  p.  705. 

«  See  Kenick  and  Thompson,  Political  Science  Quarterly,  Vol 
VI.,  pp.  248-281,  and  Vol.  VII.,  pp.  468-482. 


CHAr.  I  CONTROL   AND  AUDIT  425 

The  idea  of  the  original  plan  in  the  United  States 
was  not  to  allow  of  issues  to  the  regular  Original  plan 
disbursing  officers,  but  to  control  ex-  tululnttf 
penditure  by  a  careful  scrutiny  of  the  United  states. 
accounts  or  claims  rendered.  The  treasury  was 
to  be  reached  only  after  the  claims  had  been  cut 
down  to  the  lowest  possible  figure.  Claims  against 
the  government  were  first  passed  upon  by  an  au- 
ditor, then  by  a  comptroller,  either  of  whom  might 
reject  them.  Then  the  secretary  drew  a  warrant 
upon  the  treasurer,  and  that  warrant  was  recorded 
by  the  register  and  countersigned  by  the  comp- 
troller. Hamilton  found  it  necessary,  for  the  sake 
of  economy,  to  pay  cash  for  many  things  needed 
by  the  government,  and  hence  this  original  plan 
broke  down.  Issues  were  made  to  disbursing  offi- 
cers, and  the  necessary  warrants  were  drawn  for 
each  particular  item  of  expenditure,  afterward,  in 
order  to  legalise  the  transaction. 

For  many  years    the    United  States   had    a    very 
complicated    system    of   audit,  control,  and    record. 
There  were  six   auditors,  so  called,  and   77;^^^^^^^^ 
the    "commissioner  of  the  general  land   abandoned 
office,"  who  was  auditor  for  the  lands  ac-   ^  "^' 
count.     Then  there  were  three  comptrollers,  known 
as  the  first  and  second  comptrollers,  and  the  com- 
missioner  of   the    customs.     Lastly    there    was    the 
register.     All  of  these  were  assisted  by  a  large  body 
of  clerks.     These  offices  were  organised  into  four  co- 
ordinate branches,  with  separate  jurisdiction.     Ac- 


426         INTRODUCTION   TO  PUBIIC  FINANCE    part  iv 

counts  were  first  examined  and  passed  upon  by  an 
auditor,  then  reexamined  by  a  comptroller.  Claims 
disallowed  by  these  officers  could  be  pushed  in  the 
Court  of  Claims  and  appealed  from  there  to  the  Su- 
preme Court.  The  assignment  of  accounts  to  the 
different  auditors  and  comptrollers  was  almost 
arbitrary  and  with  little  system.  The  first  auditor 
looked  over  the  general  income  and  expense  accounts 
of  the  treasur}^  the  special  accounts  of  the  customs 
receipts,  the  expenditures  for  the  legislative  and 
executive  departments,  special  accounts  of  the  treas- 
ury department,  —  as  of  the  interstate  commerce 
commission,  of  the  public  debt,  of  engraving  and 
printing,  of  the  coast  and  geodetic  survey,  of  the 
life-saving  service,  of  the  lighthouse  establishment, 
of  the  public  buildings,  of  the  government  of  ter- 
ritories, of  the  District  of  Columbia,  of  the  central 
administrative  departments  of  war,  navy,  the  in- 
terior, etc.,  of  the  departments  of  labour  and  of 
agriculture,  and  all  the  expenditure  for  the  judi- 
ciar3^  The  second  auditor  had  the  accounts  from 
the  Indian  service  and  the  army.  The  third 
auditor  had  the  pension  account.  The  fourth  had 
the  accounts  of  the  navy.  The  fifth  looked  over 
the  accounts  of  the  collector  of  the  internal  reve 
nues.  The  sixth  was  for  the  postal  accounts.  The 
first  comptroller  then  revised  the  accounts  that  were 
assigned  to  the  first  and  fifth  auditors,  except  the 
customs  account,  for  which  the  commissioner  of  the 
customs  was  comptroller,  and  those  of  the  commis- 


CHAP.  I  CONTROL   AMD   AUDIT  427 

sioner  of  the  general  land  office.  The  second  comp- 
troller had  the  accounts  of  the  second,  third,  and 
fourth  auditors. 

All  of  this  was  changed  by  "  the  act  of  July  31, 
1894,  making  appropriations  for  the  legislative,  exec- 
utive, and  judicial  expenses  of  the  gov-  „, 
ernment  for  the  fiscal  year  ending  J mwq  -plan  of  audit 
30,  1895.  This  act  altered  the  account- ""^  "^^^"''^• 
ing'  offices  of  the  treasury  and  changed  materially 
the  system  of  accounting.  The  detail  revision  of 
accounts  heretofore  made  by  the  first  comptroller, 
as  well  as  by  the  second  comptroller  and  the  com- 
missioner of  customs,  was  abolished,  as  were  the 
offices  of  the  second  comptroller  and  the  commis- 
sioner of  customs,  the  first  comptroller  being  made 
the  sole  comptroller  of  the  treasury.  A  revision  of 
accounts  under  the  new  system  is  only  made  when 
either  the  head  of  a  department  or  the  claimant  is 
dissatisfied  with  the  settlement  of  an  account  by  an 
auditor,  or  when  the  comptroller  himself  has  reason 
to  believe  that  any  particular  account  ought  to  be 
subjected  to  a  second  revision.  Much  labour  has  been 
saved  by  this  system,  and  the  adjustment  of  accounts 
has  been  greatly  expedited.  It  was  one  of  the  duties 
of  the  first  comptroller  to  '  countersign  all  warrants 
drawn  by  the  Secretary  of  the  Treasury  which  shall 
be  warranted  by  law.'  This  duty  was  continued 
with  the  comptroller  of  the  treasury  under  the  new 
system.  As  the  Secretary  of  the  Treasury  has  the 
duty  devolved  upon   him  of   originating    warrants. 


428  INTRODUCTION   TO  PUBLIC  FINANCE    part  iv 

and  as  all  such  warrants  must  be  countersigned  by 
the    comptroller,  no  warrant  finally  becomes  effec 
tive  without  their  concurrent  action."  ^ 

There  are  now  six  auditors  :  (1)  for  the  treasury 
department,  (^)  for  the  war,  (3)  for  the  interior, 
(4)  for  the  navy,  (5)  for  the  State  and  other  depart- 
ments, (6)  for  the  post-office.  The  accounts  are 
still  distributed  in  the  old  arbitrary  unsystematic 
fashion  among  the  different  auditors  according  to  the 
illogical  scheme  by  which  the  different  duties  are 
divided  among  the  departments. ^  It  is  hard  to  see 
how  this  can  be  bettered  until  the  work  of  the 
departinents  is  rearranged.  The  recent  change  is 
a  great  gain  in  the  direction  of  simplicity  and  speed. 
The  auditor's  work  stands  unless  appealed  to  the 
comptroller,  and  is  no  longer  necessarily  gone  over 
again  by  a  comptroller. 

The  register  keeps  ledger  accounts  with  all  ap- 
propriations made  by  Congress,  and  also  keeps  all 
The  Register's  ^^^^  personal  disbursement  and  receipt 
office.  accounts  pertaining  to  the  customs,  in- 

ternal revenue,  diplomatic,  treasury,  judiciary,  inte- 
rior, civil  services,  and  the  public  debt.  General 
receipt  and  expenditure  ledgers  have  been  kept 
running  from  the  foundation  of  the  government. 
The  register  furnishes  to  the  proper  accounting 
officers  copies  of  all  warrants  covering  proceeds  of 
government  property,  where  the  same  may  be  nec- 

1  Finance  Beport,  1894,  pp'.  836,  837. 

2  See  Wilson,  The  State,  pp.  567-570. 


CHAP.  I  CONTROL   AND  AUDIT  429 

essary  in  the  settlement  of  accounts  in  their  re- 
spective offices.  He  also  furnishes  certificates  of 
balances,  advances,  and  repayments  to  the  offices 
of  the  first  and  fifth  auditors,  for  settlements  of 
accounts,  and  certifies  to  the  first  comptroller,  on 
requisitions  for  advances,  the  net  indebtedness  of 
disbursing  agents  as  shown  by  the  ledgers.*  The 
treasury  department  itself  exercises  a  pretty  ex- 
tensive supervision  over  expenditures. 

The  system  of  disbursing  officers,  one  connected 
with  each  bureau,  commission,  department,  or  other 
branch  of  the  government  to  which  appropriations 
are  granted,  still  continues  in  the  federal  government. 
Each  of  these  officers,  under  bond,  receives  such  ad- 
vances from  the  treasury  as  may  be  necessary,  and 
pays  the  various  claims  that  may  come  up  against 
his  appropriation.  He  is  responsible  for  the  pay- 
ments he  makes  until  released  by  the  approval  of  the 
proper  auditor  and  of  the  comptroller. 

In  general  it  may  be  said  that  public  audit  is  much 
the  same  as  private  audit.  It  has  for  its  object  a  certi- 
fication, by  some  properly  constituted  authority,  that 
each  collection  and  each  disbursement  was  made  in 
accordance  with  law.  The  fact  that  in  public  audit 
the  connection  between  the  collection  or  the  disburse- 
ment and  the  law  has  to  be  clearly  established  gives 
to  public  audit  a  degree  of  formality  that  is  not  al- 
ways observed  in  private  audit.  Another  difference 
is  found  in  the  fact  that  the  public  audit  usually 
1  Finance  Meport,  1894,  p.  737. 


^ 


430         INTRODUCTION   TO  PUBLIC  FINANCE    part  iv 

closes  with  a  formal  certification,  which  relieves  the 
collecting  or  disbursing  officer  of  f  u  rther  responsibility. 
Such  certificates  are  either  issued  to  the  officers,  at 
stated  intervals,  or  are  appended  to  each  voucher, 
whether  for  collections  or  for  disbursements. 


CHAPTER   II 

COLLECTION   OF    THE   REVENUES,    CUSTODY    OF  THE 
FUNDS,   AND   THE   PUBLIC    ACCOUNTS 

Section  1.  Under  the  early  methods  of  collecting 
revenues,  the  tribute  due,  the  economic  receipts,  and 
the  voluntary  contributions  were  delivered  directly 
to  the  chief  or  leader.  Many  of  the  early  direct  taxes 
were  similarly  treated.  Indirect  taxes  upon  com- 
modities and  transactions  could  not  be  managed  in 
this  way.  The  first  crude  method  of  dealing  with 
these  taxes  was  that  of   the  tax-farmer,    ^    ,       ,,    , 

'    tarly  methods 

the  Roman  publican.  He  purchased,  for  of  collecting 
a  price,  the  privilege  of  collecting  all  of  ''^'"^'''^^' 
certain  kinds  of  taxes  that  he  could  obtain.  The 
same  method  was  extended  to  other  taxes  where 
there  was  no  similar  necessity  for  it.  This  farming 
of  taxes  was  used  through  the  imperial  era  of  ancient 
Rome,  and  copied  by  France,  it  was  extended  into 
modern  times.  The  various  direct  contributions  of 
the  middle  ages  which  were  apportioned  among  the 
different  cities  or  "estates,"  were  frequently  delivered 
directly  to  the  prince  or  his  treasurer.  All  of  these 
crude  methods  were  abandoned  as  soon  as  there  was 
a  distinct  recognition  of  the  authority  of  the  taxing 
power  over  all  the  different  parts  of  the  country  and 

431 


432          INTRODUCTION   TO  PUBLIC  FINANCE     part  iv 

over  each  contributor  individually.  The  apportion- 
ment system,  as  originally  used,  was  a  more  or  less 
distinct  recognition  of  the  autonomy,  and  possibly 
of  the  partial  political  independence,  of  the  taxpayers, 
be  they  provinces,  cities,  or  classes  of  individuals. 

Sec.  2.  The  collection  of  the  taxes  is  usually 
the  duty  of  the  regular  fiscal  officers  of  the  general 
administration,  but  industrial  and  commercial  receipts 
are  frequently  collected  by  special  boards  in  charge 
of  them,  who  turn  the  money  over  to  the  treasury. 
Assessment  and  collection  are  so  closely  connected 
that  they  can  be  studied  together.  In  the  collection 
of  customs  duties  there  are  two  things  for  the  officials 

Coll  t'on  of  ^^  ^^^®  ^^^'  ^^^  They  must  look  out  for 
customs  the  arrival  of  all  the  taxable  commodities 

duties.  ^^^  prevent  smuggling.     (2)  They  must 

ascertain  the  value  of  the  goods  if  the  taxes  are  ad 
valorem^  and  the  number  and  size  of  the  pieces  if 
specific.  The  invoices,  supported  by  the  usual 
certificates,  oaths,  etc.,  are  of  the  nature  of  a  declara- 
tion by  the  owner,  or  importer.  They  are  then  sub- 
jected to  the  scrutiny  of  official  appraisers,  whose 
knowledge  of  the  nature  and  value  of  the  goods  is 
very  accurate.  The  tax  is  then  paid  to  the  collector  at 
the  place  of  importation  or  when  it  reaches  the  recipi- 
ent in  the  interior,  but  before  it  is  delivered  to  him. 
In  case  the  goods  are  to  be  admitted  into  the  interior 
of  the  country,  or  of  the  customs  district,  before  the 
tax  is  paid,  as  is  the  case  when  the  person  to  whom 
the  goods  are  sent  resides  in  the  interior,  the  pack- 


CHAP.  II  COLLECTION  433 

age  is  sealed  up,  or  "  bonded,"  and  the  seals  can  only 
be  broken  by  an  authorised  collector  after  the  pay- 
ment of  the  tax.  In  countries  where  there  are  no 
general  tax-collectors  in  the  interior,  this  method  is 
not  feasible,  and  the  goods  are  held  in  the  custom- 
house on  the  boundary  until  the  tax  is  paid.  With 
a  few  exceptions  this  is  the  practice  of  the  United 
States.  But  in  Germany,  where  there  are  regular 
fiscal  officers  of  the  central  government  in  almost 
every  hamlet,  goods  are  regularly  shipped  to  the 
consignee,  and  the  tax  paid  in  the  interior. 

In  the  case  of  excises,  the  factories,  breweries, 
fields,  and  other  places  where  the  taxed  goods  are 
produced  are  subject  to  regular  inspec-  collection  of 
tions,  and  are  more  or  less  under  the  excises. 
constant  supervision  of  the.  officials.  The  tax  is 
collected  directly  from  the  producer  or  by  the  sale 
of  stamps  and  licenses. 

Sec.  3.  In  the  case  of  direct  taxes,  it  is  the  assess- 
ment that  is  the  most  difficult  part  of  the  process. 
The  methods  of  assessing  some  of  the  Assessment  oj 
taxes  have  already  been  suggested.  The  direct  taxes. 
work  consists  of  two  parts.  (1)  It  is  necessary  to 
ascertain  the  base  —  the  persons,  the  property,  or  the 
revenues  subject  to  taxation.  (2)  It  is  then  neces- 
sary to  fix  upon  the  valuation,  or  the  rating  of  the 
base  in  each  particular  case.  The  latter  part  of 
the  process  is  "making  the  assessment."  In  this  the 
contributor  may  be  called  upon  to  assist,  or  the 
officers   of  the  government    may   proceed    entirely 

2f 


434         INTRODUCTION  TO  PUBLIC  FINANCE    part  iv 

alone.  Generally  a  declaration  is  requested,  or  may 
be  required,  from  the  taxpayer,  and  the  officials  then 
investigate  the  truth  of  that  declaration.  In  Europe 
it  is  customary  to  form  assessment  commissions  con- 
sisting of  representatives  of  the  taxpayers  in  the 
district,  who  are  acquainted  with  the  local  con- 
ditions and  act  with  the  officers  of  the  government. 
These  commissions  help  the  regular  officers  of  the 
fiscus  to  make  the  assessment,  or  sit  as  a  sort  of 
court  to  hear  appeals  from  the  assessment  made, 
or  both.  The  final  assessment,  however,  is  made 
by  the  fiscal  officers. 

In  the  American  commonwealths  the  assessment 
of  the  general  property  tax  is  usually  made  by  a 
Assessment  of  ^^^^^  ^^  locally  elected  assessors  or  an 
the  general  asscssor.  The  asscssor  calls  for  declara- 
propertytax.     ^^^^^   fp^,^   ^\^q   different    Contributors. 

The  law  in  most  States  imposes  severe  penalties 
for  failure  to  comply  with  the  requirement  of  dec- 
laration or  for  false  declaration.  But,  nevertheless, 
there  is,  for  the  most  part,  the  utmost  laxity  in  enforc- 
ing the  law  concerning  declarations.  Only  the  un- 
usually conscientious,  who  voluntarily  come  forward 
with  complete  statements,  are  reached  in  this  way. 
So  general  is  the  habit  of  neglecting  this  duty  that 
it  is  practically  impossible  for  the  assessor,  no  matter 
how  anxious  he  may  be  to  have  the  law  complied 
with,  to  prosecute  all  the  persons  whom  he  knows 
are  evading  assessment.  The  general  practice  is  to 
default  the  declaration  and  allow  the  assessor  to  find 


CHAP.  II  COLLECTION  435 

out,  if  he  can,  what  taxable  property  the  contributor 
has.  If  this  were  done  by  only  a  few  Difficidtyof 
persons,  they  could  easily  be  brought  n^^l^^^^ 
to  terms  under  the  existing  laws,  but  tions/' 
when  nine-tenths  of  the  population  refuse  to  com- 
ply, the  assessor  is  helpless,  and  the  only  effect 
that  follows  from  the  declaration  by  the  few  is  to 
make  the  existing  inequalities  of  the  general  prop- 
erty tax  worse  than  ever.  Real  estate  and  other 
visible  property  is  easily  assessed.  The  officer  has 
at  his  command  the  records  of  titles,  of  deeds,  etc., 
which  he  can  investigate,  and  he  ascertains  the 
value  of  each  piece  from  his  own  personal  observa- 
tion of  prevailing  prices.  As  we  have  seen,  per- 
sonal, intangible  property  escapes  almost  entirely. 
It  would  seem  that  this  difficulty  of  administration 
is  insuperable.  No  merely  severe  methods  of  assess- 
ment will  ever  cure  the  evil. 

Above  the  assessor  in  the  United  States  there  are 
generally  two  boards  of  equalisation,  though  some- 
times only  one.     The  first  board  is  local, 

,  T        .  ^  Equalisation. 

covering  the  same  district  as  the  assessor. 
This  hears  appeal  from  the  taxpayers  in  regard  to 
their  assessment.  It  equalises  between  individuals. 
The  second  board  is  for  the  whole  commonweal tli, 
and  is  known  as  the  state  board  of  equalisation. 
This  board  is  to  adjust  the  burden  of  state  taxation 
equally  between  the  different  districts.  As  has  al- 
ready been  explained,  a  local  assessor  may  make  the 
assessment  in  his  district  lower  than  that  in  the  other 


436         INTRODUCTION  TO  PUBLIC  FINANCE    part  iv 

districts.  This  will  not  affect  the  burden  of  local 
taxation,  for  all  that  is  needed  is  to  raise  the  rate. 
But  it  lessens,  if  the  assessment  stands,  the  burden 
which  the  state  taxes  impose.  These  central  boards 
are  of  three  kinds  :  (1)  those  with  power  to  add  to 
or  subtract  from  the  assessment  of  each  district,  but 
in  such  a  way  as  not  to  change  the  total  amount  ; 
(2)  those  with  power  to  change  the  assessment  of  any 
district,  and  which  may  and  generally  do  change  the 
total  assessment  of  the  state ;  and  (8)  those  with 
power  to  change  the  valuation  not  only  of  districts  as 
a  whole,  hut  of  classes  of  property,  or  even  of  indi- 
viduals within  any  district.  As  these  boards  seldom 
have  sufficient  powers,  and  never  sufficient  informa- 
tion as  to  the  local  conditions,  the  effect  of  their  ac- 
tion is  not  all  that  could  be  desired.  The  only 
possible  solution  of  this  difficulty  is  the  separation  of 
local  taxation  from  that  of  the  commonwealths,  so 
that  the  assessment  can  be  made  independently  for 
each. 

Sec.  4.  After  the  assessment  has  been  completed, 
it  is  comparatively  easy  to  make  the  collection.  All 
that  is  needed  is  a  collecting  agent  of  the  treasury 
conveniently  located,  to  whom  the  taxpayers  may 
Convenience  go^  01"  a  Collector  who  goes  to  the  tax- 
of  the  contrih-    payers.     The  burden  of  taxation  may  be 

tdor  to  he  con- 
sulted in  seriously  increased  if  the  convenience  oi 

collection.  i]^q  taxpayers  is  not  consulted  in  this 
matter.  The  size  of  the  district  over  which  a  col- 
lector has  supervision  will  depend  upon  the  density 


CHAP.  II  COLLECTION  437 

of  the  population.  If  the  collector  is  to  be  sought 
out  by  the  contributors,  it  is  best  that  his  office  should 
be  located  in  some  business  centre  frequently  visited 
by  the  contributors.  According  to  the  principle  of 
"certainty  and  convenience,"  the  taxes  assessed  upon 
the  same  person  should  all  be  entered  in  a  single  bill 
and  all  be  payable  to  the  same  collector.  The  tax- 
payer should  be  informed  as  early  as  possible  of  the 
total  amount  of  taxes  that  he  has  to  pay,  of  the  num- 
ber of  instalments  in  which  they  are  payable,  and  of 
the  conditions  of  delinquency  and  its  penalty.  Some 
of  the  American  commonwealths  disregard  this  rule 
entirely.  They  add  grievously  to  the  burden  of  tax- 
ation, especially  in  the  country  districts,  where  they 
are  already  entirely  out  of  proportion  to  the  ability 
of  the  people,  and  increase  the  irritation  felt  by  the 
contributors,  by  inconvenient  location  of  the  collec- 
tor's office,  and  by  requiring  the  payment  of  state 
and  county  taxes  to  one  set  of  collectors,  while  the 
town  and  other  municipal  taxes  are  paid  to  a  differ- 
ent set  and  upon  separate  bills.  The  most  econom- 
ical and  least  irritating  process  is  to  have  all  the 
taxes  collected  by  the  same  person.^ 

Sec.  5.  The  transfer  of  the  public  funds  from  one 
part  of  the  country  to  another  is,  in  modern  times, 
attended  with  little  risk.     It  is  most  conveniently 

1  The  writer  knows  of  an  instance  where  a  farmer  has  to  travel 
fifty  miles  to  pay  his  state  and  county  taxes,  while  the  local  taxes 
are  collected  within  two  miles  of  his  home.  This  is  not  an  ex- 
treme case. 


438         iNTROl)UCTION   TO  PUBLIC  FINANCE    fART  iV 

done  by  means  of  the  banks  or  the  post-office.  If  the 
Means  of  country  is  sparsely  populated  and  inse- 
trans/erring      cure,   the  collector's  officc  should  be  at 

public  money  tit  i       .  i  •    i        i 

from  place  to  ^^  ^^''^^  ^"6  bank  or  vault  in  which  the 
place.  money  is  to  be  stored.     In  large  coun- 

tries, as,  for  example,  the  United  States,  it  is 
convenient  to  have  a  number  of  branch  treasuries 
scattered  about  the  country,  at  which  collections  can 
be  made,  and  through  which  money  for  expenditure 
can  be  distributed  to  the  disbursing  officers.^ 

The  storage  or  safe-keeping  of  the  funds  is  accom- 
plished in  one  of  three  ways.  (1)  As  in  England 
Storage  of  the  ^  great  State  bank  is  made  custodian  of 
public  funds,  i^^q  funds  which  are  sent  to  it  from  the 
various  collectors  who  deposit  with  its  branches. 
(2)  As  in  France  and  the  United  States  the  treas- 
ury and  the  subtreasuries  are  the  chief  custodians 
of  the  funds. 2  (3)  As  in  the  commonwealths  of  the 
United  States,  where,  except  in  a  few  states,  private 
or  other  banks  are  made  the  depositories  of  the  public 
moneys.  When  protected  by  proper  safeguards, 
such  as  the  giving  of  personal  bonds  and  collateral, 
the  bank  depository  system  has  proved  itself  far 
safer  and  more  economical  than  the  independent 
treasury,  which  is  only  to  be  defended  on  political 

1  Subtreasuries  are  at  Baltimore,  Boston,  Chicago,  Cincinnati, 
New  Orleans,  New  York,  Philadelphia,  St.  Louis,  and  San  Fran- 
cisco. 

2  According  to  law,  the  treasurer  and  disbursing  officers  of  the 
United  States  may  make  deposits  in  the  national  banks.  About 
$14,000,000  are  regularly  so  deposited. 


1 


CHAP.  II  PUBLIC  ACCOUNTS  439 

grounds,  if  at  all.  The  experience  of  the  United 
States  federal  government  in  the  early  days  with 
"pet  banks"  points  to  the  political  difficulties  of 
the  bank  depository  system.  The  bank  deposit 
system  prevents  the  periodic  disturbance  of  the 
circulation  by  the  withdrawal  or  storage  of  money. 
If  the  independent  treasury  system  were  used  by 
all  the  departments  of-  the  government,  this  dis- 
turbance would  possibly  be  serious  enough  to  affect 
prices.^ 

Sec.  6.  The  mere  mechanical  details  of  the 
methods  of  bookkeeping  and  public  accounts  can- 
not be  described  here.  About  all  that  can  be  done 
is  to  make  such  explanation  as  will  enable  the  stu- 
dent to  easily  comprehend  the  published  accounts 
and  statistics  in  their  main  features. 

The  revenue  account  is  generally  very  simple.     It 
contains  items  named  according  to  the  sources  from 
which  they  come.     Care  must  be  taken  p^i^ 
in  studying  the  reports  of  the  fiscal  offi-  accounts, 
cers  on  the  revenues  to  distinguish  the     ^^  **  ' 
receipts  that  represent  income  from  the  receipts  that 
are  merely  formal  transfers  and  bookkeeping  expedi- 
ents.    For  example,  the  English  finance  account  of 
the  United  Kingdom  for  the  year  ending  March  31, 
1895,  contains  the  following  :  Receipts — I.  Balance 
in  Exchequer,   April  1,  1894,  £5,977,118  18s.   9d.  ; 

1  Cf.  Kinley's  "Independent  Treasury,"  and  Buckley's  "Cus- 
tody of  State  Funds,"  Annals  of  the  American  Aoademy,  Vol.  VI., 
3,  November,  1895. 


440         INTRODUCTION   TO  PUBLIC  FINANCE    part  iv 

II.  Revenues  received  into  the  Exchequer,  viz. 
customs,  excises,  etc.,  £94,683,762  10s.  ^d.\  total, 
X100,660,881  8s.  \\d.  This  was  what  England  had 
to  draw  on.  But  following  that  appear  a  number 
of  other  "  Exchequer  receipts,"  among  which  are  re- 
payments of  advances  ;  as,  (1)  by  the  mint  for  the 
purchase  of  bullion  for  coinage,  .£700,000,  represent- 
ing merely  a  return  to  the  Exchec^uer  of  money 
temporarily  passed  to  the  mint.  The  same  year  the 
Exchequer  advanced  to  the  mint  £615,000,  which 
will  appear  in  1896  as  a  receipt  increased  by  the 
seigniorage.  (2)  The  Exchequer  borrows  money 
temporarily  in  anticipation  of  the  revenues.  This 
appears,  of  course,  as  a  receipt  of  £13,700,000,  but  is 
not  revenue.  (3)  It  renewed  a  number  of  outstand- 
ing bills  and  bonds  amounting  to  £14,123,400. 
These  appear  as  receipts,  offset,  of  course,  by  an 
equal  expenditure.  But  (4)  it  created  an  ad- 
ditional debt  of  £760,000,  for  barracks  and  tele- 
graph. This  sum  may  fairly  be  called  revenue. 
So  that  the  total  amount  of  money  that  came  as 
actual  income  to  the  treasury  was  £101,420,881  8s. 
\\d.  But  the  total  receipts  foot  up  £130,217,647 
13s.  M. 

On  the  expenditure  side  the  issues  or  credits  to 
disbursing  officials,  are  first,  the  consolidated  fund 
"services";  that  is,  the  payments  for  (1)  the 
"  national  debt  services,"  (2)  the  "  other  consoli- 
dated fund  services,"  which  consist  of  the  civil  list, 
annuities  and  pensions,  salaries  and  allowances,  courts 


,1 


CHAP.  II  PUBLIC  ACCOUNTS  441 

of  justice,  miscellaneous  "  services,"  the  Exchequer 
contributions  to  Ireland,  and  the  annuity  under 
the  Indian  army  pension  deficiency  act  of  1885. 
After  the  consolidated  fund  "  services,"  which  foot 
up  to  £26,500,000,  come  the  supply  "services"  for 
the  army,  ordnance  factories,  navy,  and  miscellane- 
ous civil  "  services,"  for  the  collection  of  customs 
and  inland  revenue,  post-ofhce,  telegraph,  and  postal 
packet  "services."  These  two  items,  the  consoli- 
dated fund  and  supply  "  services,"  contain  all  that 
is  strictly  chargeable  to  the  revenue.  They 
amounted  in  1895  to  £93,918,420  188.  \d.  In  ad- 
dition there  were  special  expenditures  of  £810,000, 
making  a  total  of  £94,728,420  18s.  U.  But  there 
were  a  large  number  of  additional  issues:  (1)  bills 
and  bonds  paid  off  by  receipts  from  new  bills,  (2) 
temporary  advances  repaid,  a  part  of  which  were  for 
deficiencies  in  the  consolidated  fund.  These  and 
one  or  two  other  minor  items,  with  a  balance  of 
£6,300,826  15s.  4c?.,  brought  the  "issues"  up  to  the 
receipts. 

In  studying  the  accounts  published  by  the  treas- 
ury department  of  the  United  States,  we  have  dif- 
ferent   difficulties    to    meet.      There   is  p^^^^-^ 
generally  a   clear   statement,  free  from  accounts, 
repetitions,  or  transfers,  of  the  revenues 
according     to     the     sources,    and     of    expenditures 
according    to    departments,    or   objects.     The   only 
difficulties   arise   from   the   peculiar    and    arbitrary 
grouping  of  the  expenditures.     This  comes  from  the 


442         INTRODUCTION   TO   PUBLIC  FINANCE    part  iv 

illogical  distribution  of  duties  among  the  different 
departments  already  referred  to.  Some  of  the 
peculiarities  are  that  the  expenditure  for  the  "  civil 
establishment "  includes  foreign  intercourse,  public 
buildings,  collecting  the  revenues,  deficiency  in 
postal  revenues,  rebate  of  tax  on  tobacco,  refunding 
of  direct  taxes,  French  spoliation  claims,  District  of 
Columbia,  and  similarly  incongruous  items.  Those 
for  the  military  establishment  included  rivers  and 
harbours,  forts,  arsenals,  and  sea-coast  defences ;  for 
the  naval  establishment  included  construction  of  new 
vessels,  machinery,  armament,  equipment,  and  im- 
provement of  navy  yards.  Expenses  not  otherwise 
classified  are  generally  listed  as  expenses  of  the 
treasury  department. 

Sec.  7.    An  interesting  phase  of  public  bookkeep- 
ing is  the  separation  of  accounts  into  funds. ^     When 
Parliament  voted  a  tax,  it  was  formerly 

The  "funds."  .  "^ 

for  a  definite  purpose,  and  the  plan  was 
to  reserve  the  whole  of  it  for  the  proposed  purpose. 
But  the  receipts  and  expenditures  of  these  funds 
never  exactly  balanced,  and  simplicity  finally  re- 
quired that  all  should  be  turned  into  the  consoli- 
dated fund.  This  method  of  bookkeeping  is  best  ex- 
hibited to-day  by  the  accounts  of  the  commonwealths 
in  the  United  States,  although  also  used  in  national 
and  municipal  accounts  to  some  extent.  All  the  re- 
ceipts are  distributed  among  various  so-called  "  funds," 

1  A  "fund"  in  this  sense  is  practically  an  appropriation  for  a 
specified  purpose  or  group  of  purposes. 


CHAP.  11  PUBLIC  ACCOUNTS  443 

or  accounts,  according  to  some  prearranged  plan.  A 
separate  account  is  kept  of  all  receipts  and  expendi- 
tures belonging  to  each  fund.  With  the  exception 
of  a  few  trust  funds  arranged  to  keep  certain  sums 
inviolate,  these  funds  are,  in  effect,  mere  book- 
keeping contrivances.  With  the  exception  of  the 
general  fund,  which  receives  all  the  money  not 
otherwise  appropriated  to  special  funds,  each  of 
these  accounts  generally  bears  the  name  of  the  ex- 
penditure met  thereby,  sometimes  of  the  revenues 
supplying  them.  In  some  commonwealths  the  num- 
ber of  these  funds  is  very  large. ^  The  accounts 
are  sometimes  complicated  by  transfers  from  one 
fund  to  another,  in  which  case  they  appear  twice 
in  the  account,  and  frequently  swell  the  apparent 
receipts  enormously. 

Local  budgets  are  necessarily  determined  by  the 
frame  of  local  government  and  the  number  of  func- 
tions performed  by  each.  Thus  in  Eng-  j^cai 
land  the  public  function  to  be  performed  (accounts. 
constitutes  the  basis  of  local  organisation,  and  until 
the  recent  reforms  each  local  governing  body  had 
only  one  or  two  duties  ;  hence  only  one  or  two  gen- 
eral accounts  of  expenditures,  and  one  or  two 
sources  of  income.  But  in  America  each  local 
governing  body  generally  has  charge  of  all  the 
local  functions  affecting  a  certain  area,  and  may 
have   as  many   expenditures  and  revenues  as  a  com- 

1  See  Seligman,  "  Finance  Statistics  of  the  American  Common- 
wealths," Pub.  Amer.  Statistical  Assoc,  December,  1889. 


^ 


444         INTRODUCTION   TO  PUBLIC  FINANCE    pakt  iv 

monwealth,  or  even  more.  Here  methods  of  account- 
ing defy  classification  and  frequently  defy  sensible 
interpretation,  even  by  the  officials  in  charge. 
There  is  a  crying  need  for  reform  here  in  the  direc- 
tion of  uniformity.  1 

1  See  in  this  connection  a  form  suggested  for  published  reports  of 
municipalities  by  Professor  H.  B.  Gardner,  in  the  Fub.  of  the  Amer. 
Statistical  Assoc,  June,  1889,  and  adopted,  in  part,  by  the  Eleventh 
Census  of  the  United  States,  as  the  basis  of  schedules  and  inquiries 
sent  to  the  municipalities.  The  studies  of  local  and  commonwealth 
accounting  made  by  the  United  States  Census  Bureau  and  pub- 
lished in  the  volume  on  Wealth,  Debt,  and  Taxation,  1907,  are 
especially  valuable. 


CHAPTER   III 

FINANCIAL  ADMINISTRATION  OF  WAR  ;  ILLUS- 
TRATED BY  THE  EXPERIENCE  OF  THE  UNITED 
STATES   IN   THE   WAR   WITH   SPAIN 

Section  1.  A  serious  war  usually  imposes  a 
sudden,  new  burden  upon  the  treasury,  the  exact, 
or  even  the  approximate,  size  of  which  it  is  not  pos- 
sible to  estimate  at  the  outset.  Many  of  „^ 
the  expenses  of  war  belong  to  that  class  ordinary" 
which  financiers  call  "  extra-ordinary  "  to  ^^p^'^^^^- 
distinguish  them  from  the  usual  or  current  expenses 
of  the  government.  The  amount  by  which  the  ordi- 
nary expenses  are  increased  in  time  of  war  depends 
upon  many  circumstances.  Obviously,  the  chief  fac- 
tor is  the  size  of  the  forces  engaged  and  the  duration 
of  the  struggle.  Naturally,  the  chastisement  of  a 
few  dozen  hostile  Indian  braves  in  the  immediate 
vicinity  of  the  regular  army  posts  involves  practi- 
cally no ""  extra-ordinary  "  expenses.  Allowance  is 
usually  made  in  the  ordinary  budget  for  the  ex- 
penses a  war  of  that  kind  would  occasion.  But 
many  circumstances  less  obvious  than  the  size  of 
the  forces  engaged  enter  into  the  determination  of 
the  amount  of  the  "  extra-ordinary  "  expenditures. 
Thus,  for  example,  a  naval  war,  unless  it  happens  to 
become  the  occasion  for  the  purchase  of  new  ships, 

445 


446         INTRODUCTION   TO  PUBLIC  FINANCE     part  iv 

involves  comparatively  little  addition  to  the  ordi- 
nary expenses  of  maintaining  the  navy.  A  country 
which  has  a  large  standing  army  incurs  relatively 
less  "  extra-ordinary "  expense  when  engaging  in 
war  than  a  country  which,  like  the  United  States, 
has  only  a  small  regular  army. 

The  ordinary  expenses  being  provided  for  by  the 
regular  budget,  the  financier's  chief  concern  in  time 
of  war  is  the  provision  of  the  "  extra-ordinary  "  funds. 
If  the  operations  of  the  war  are  likely  to  interfere  with 
the  ordinary  revenues,  he  must  furthermore  be  pre- 
pared to  treat  a  part  of  the  ordinary  expenses  as 
"  extra-ordinary,"  at  least  to  the  extent  of  furnishing 
new  means  to  meet  them.  It  is  not  often  possible, 
and  still  less  often  expedient,  to  curtail  the  ordinary 
expenditures  in  any  way  for  the  purpose  of  saving 
„.  ,,  money  to  meet  the  new  expenses.  How 
presented  to  incrcasc  the  receipts  of  the  treasury  by 
by  war,  ^^  amouut  sufficient  to  insure  the  efficient 

conduct  of  the  war,  without  too  serious  disturbance 
of  the  industries  and  commerce  of  the  people,  upon 
which  all  the  revenues  depend,  is  the  problem  for 
the  finance  minister  to  solve.  The  "  extra-oMinary  " 
demands  come  thick  and  fast,  especially  at  the  be- 
ginning of  the  war,  and  they  must  be  met,  and  met 
at  once.  The  amount  which  may  be  needed  at  any 
given  time  is  not  ascertainable.  But  in  spite  of 
that,  sufficient  funds  must  always  be  on  hand. 
Upon  this  more  than  upon  an}^  other  one  thing 
depends  the  fate   of  war.     The  war  financier   can 


CHAP.  Ill    FINANCIAL  ADMINISTRATION   OF   WAR    447 

never  plead  that  he  has  no  funds,  nor  can  he  ask 
for  time  in  which  to  collect..  He  must  have  the 
money  when  it  is  wanted  and  in  the  amounts  re- 
quired. No  degree  of  skill  on  the  part  of  officers 
or  bravery  on  the  part  of  the  men,  no  degree  of  self- 
sacrifice  at  the  front,  can  compensate  for  failure  on 
the  part  of  the  financier  to  provide  the  ways  and 
means.  His  powers  are,  therefore,  of  the  greatest 
and  most  unusual. 

Sec.  2.  Possibly  the  most  natural  source  to  turn 
to  in  time  of  war  for  the  increased  revenues  needed 
is  the  existing  system  of  taxes.     At  first    j  , 

^     ''  Increased 

thought  it  might  seem  proper  to  attempt  rates  for 
to  obtain  new  income  by  raising  the  rates  ^  ^"^^^" 
of  the  old  taxes.  To  some  extent  this  is  possible. 
In  every  well-arranged  tax  system  there  should  be 
some  taxes  which  can  be  made  to  yield  an  increased 
revenue  by  simply  raising  the  rates.  One  of  the 
chief  reasons  for  the  establishment  and  the  retention 
of  the  British  "  property  and  income  tax,"  for  ex- 
ample, is  found  in  the  elasticity  of  the  returns. 
But  not  all  taxes  can  be  treated  in  this  way.  Some- 
times an  increase  in  the  rate  of  taxation  will  disturb 
industry  and  commerce  and  do  a  greater  injury  to 
the  welfare  of  the  people  than  is  received  from  the 
damages  of  war.  Again,  an  increase  in  the  rates 
of  certain  taxes  will  diminish  the  revenue  or  even 
destroy  it  entirely.  In  not  a  few  taxes  the  only  way 
to  increase  the  revenue  is  to  lower  the  rates.  This 
is  the  case  with  most  protective  duties.     Any  change 


448         INTRODUCTION   TO  PUBLIC  FINANCE    part  iv 

in  the  rate  of  such  taxes  is  bound  to  affect  industry 
and  commerce,  and  to  effect  them  unfavourably  in  the 
first  instance,  whatever  the  subsequent  effect  may 
be.  A  war  brings  perplexities  enough  to  business 
without  the  creation  of  artificial  ones,  and  the  finan- 
cier should  not  interfere  with  these  taxes.  It  added 
not  a  little  to  the  perplexities  and  dangers  of  the 
Civil  War  in  the  United  States  that  the  industry  and 
commerce  of  the  people  were  repeatedly  disturbed 
during  the  war  by  changes  in  the  tariff  as  well  as  by 
the  military  and  naval  operations  themselves.  There 
are,  therefore,  but  a  limited  number  of  old  taxes 
from  which  any  aid  can  be  sought.  In  the  United 
States,  owing  to  the  one-sided  system  of  federal 
taxation,  the  number  of  them  is  very  small  indeed. 
The  American  financier  must  look  elsewhere  for  his 
new  revenues. 

Sec.  3.    The    next    resource,    naturally,   is    new 

taxes.     But  the  establishment  of  new  taxes,  or  even 

the  restoration  of  old  taxes  not  in  use  at 

New  taxes.  i         •  <.    i 

the  time  of  the  war,  is  a  matter  requiring 
considerable  time.  Even  if  it  were  an  easy  matter 
to  decide  upon  the  best  form  of  taxation  and  to  get 
the  necessary  authority  from  the  legislative  branch 
of  the  government,  the  organisation  of  the  new  ad- 
ministrative forces  for  the  collection  of  the  taxes  is 
a  matter  requiring  time.  No  new  system  of  taxa- 
tion reaches  its  normal  revenue-yielding  powers 
within  many  months  of  its  enactment.  If  the 
taxes  are  entirely  new,  the  time  required  is  longer, 


CHAP.   HI    FINANCIAL  ADMINISTRATION   OF   WAR     449 

But  even  if  they  are  more  or  less  familiar  to  the 
people  from  use  on  some  previous  occasion,  a  con- 
siderable lapse  of  time  must  intervene  between  the 
beginning  of  war  and  the  receipt  of  sufficient  new 
revenues  to  meet  any  considerable  part  of  its  ex- 
penses. Furthermore,  the  expenses  of  war  are  now 
so  enormous  that  any  system  of  taxation  which 
raised,  or  attempted  to  raise,  the  entire  amount 
needed  during  the  probable  duration  of  the  war 
would  be  so  burdensome  as  to  crush  the  people.  It 
is  therefore  extremely  unwise,  and  practically  im- 
possible, to  attempt  to  raise  the  entire  cost  of  the 
war  by  immediate  taxation.  The  only  other  re- 
source is  borrowing. 

Sec.  4.  The  use  of  the  public  credit  in  time  of 
war  is  attended  by  many  special  difficulties.  The 
outcome  of  war  is  always  more  or  less  y,^^  ^^  , 
uncertain.  Even  if  defeat  would  not  en-  credit  in 
tirely  cripple  the  nation's  resources  and  *^^^/^<^^- 
render  the  repayment  of  the  loan  uncertain,  or  affect 
the  payment  of  interest,  yet  there  are  many  con- 
siderations which  make  the  lender  hesitate.  The 
fact  that  the  duration  of  the  war,  the  extent  to 
which  other  nations  may  become  involved,  and  many 
similar  considerations  affecting  the  size  of  the  total 
demand  upon  the  public  credit  are  unknown,  vastly 
increases  the  difficulty  of  placing  a  loan  on  favour- 
able terms.  But  on  that  very  account  it  is  par- 
ticularly necessary  for  the  successful  administration 
of  the  war  that  everj^thing  should  be  done  to 
2g 


450  INTRODUCTION   TO  PUBLIC  FINANCE    part  iv 

strengthen  and  preserve  the  nation's  credit.  There 
may  come  a  time  in  the  progress  of  the  war  when 
the  only  source  from  which  any  funds  can  be  had  is 
the  money  market.  If,  therefore,  the  financier  has 
done  anything  to  weaken  the  nation's  credit  at  the 
beginning  of  the  war,  he  is  apt  to  be  helpless  at  the 
close.     Credit  tends  to  weaken  as  debt  increases. 

It  is  for  this  reason  that  resort  is  frequently  had  in 
early  war-borrowings  to  the  simplest  and  most  primi- 
Provision  of     ^ive    method    of    debt-making ;    namely 

revenues  to  t^at  which  prOvidcS  rCVenUCS  for  the  pay- 

preserve  f     1        •  11 

public  ment  oi  the  interest  and  the  repayment 

credit.  of  the  principal  at  the  very  time  the  debt 

is  contracted.  The  creditor  sees  in  the  new  funds 
flowing  into  the  treasury  the  security  for  his  ad- 
vances and  the  guarantee  of  good  faith  on  the  part 
of  the  government.  So  long  as  every  new  loan  is 
accompanied  by  new  taxes  from  which  its  cost  can 
be  met,  the  public  credit  is  practically  secure.  But 
if,  on  the  other  hand,  the  government  neglect  this 
precaution  during  the  first  stages  of  the  war,  any 
attempt  to  resort  to  it  at  a  later  stage  is  apt  to  be 
regarded  as  the  desperate  device  of  unsound  financial 
management  and  the  presage  of  coming  bankruptcy. 

Public  "credit  is  a  plant  of  slow  growth  and  ex- 
tremely tender.  It  withers  in  a  day  before  a  breath 
of  doubt. 

Inasmuch  as  a  successful  outcome  cannot  be  hoped 
for  in  modern  warfare  without  the  funds  obtainable 
solely  by  public    borrowing,  and   the  necessity   for 


CHAP.  Ill    FINANCIAL  ADMINISTRATION  OF   WAR     451 

loans  increases  the  longer  the  war  continues,  it  be- 
hooves the  modern  war  financier  to  guard  the  nation's 
credit  as  his  most  precious  treasure.  No  sacrifice  is 
too  great  which  will  strengthen  it  and  preserve  it 
intact  for  the  later  stages  of  the  war. 

Sec.  5.  Such,  stated  in  condensed  form,  are  the 
general  principles  which  should  guide  the  fiscus  in 
time  of  war.  No  better  illustration  of  the  applica- 
tion of  tliese  principles  can  be  found  in  history  than 
is  afforded  by  the  operation  of  the  United  States 
treasury  during  the  war  with  Spain;  and  by  follow- 
ing in  some  details  the  story  of  that  war,  we  can 
obtain  a  clearer  view  of  the  principles  themselves. 

The   situation,  as   it   confronted   Secretary    Gage 
when   the   news   of   the   destruction   of   the   Maine 
reached  Washington,  may  be  summarised   y^^g  sUua- 
somewhat  as  follows.     The  treasury  had  t^onofthe 

United 

a  balance  on  hand  of  about  $225,000,000.   states 
But,  as  we  shall  see  below,    only  about  t'^easury 

at  the  out- 

$25,000,000  of  this  was  really  available  break  of  the 
for  immediate  use  in  the  prosecution  of  ^"^• 
the  war.  The  ordinary  expenditures  of  the  govern- 
ment, outside  of  those  for  the  postal  system,  which 
was  nearly  self-supporting,  amounted  in  round  num- 
bers to  1350,000,000  per  annum.  For  the  first  time 
in  many  months  these  expenses  were  being  nearly 
met  by  the  revenues.  Indeed,  it  was  estimated  that 
at  the  ordinary  rate  of  expenditures  there  might  be 
a  slight  surplus  at  the  end  of  the  year.  The  tariff 
was  expected  to  yield  about  $200,000,000,  the  inter- 


452         INTRODUCTION  TO  PUBLIC  FINANCE    part  i^ 

nal  revenue  taxes  about  §165,000,000,  and  there  were 
about  $25,000,000  to  be  expected  from  miscellaneous 
sources. 

Sec.  6.  The  larger  part  of  the  income,  however, 
came  from  taxes  which  could  not  well  be  tampered 
with.  The  tariff  had  been  so  long  a  subject  of  con- 
ThetariiT  trovcrsy  that  there  was  little  desire  to 
could  not  alter  its  recent  settlement.     For  reasons 

ec  ange  .  already  made  clear,  there  were  many 
parts  of  the  tariff  which  could  not  well  be  changed. 
Except  in  a  very  few  instances,  the  income  to  be 
obtained  from  it  would  not  be  increased  by  raising 
the  rates.  In  the  great  majority  of  instances,  to 
raise  the  rates  would  have  been  to  lessen  the  re- 
ceipts, while  to  lower  those  rates  for  the  purpose 
of  increasing  the  income  by  allowing  larger  importa- 
tions would  have  been  to  remove  the  protection 
afforded  by  them.  This  was  contrary  to  the  avowed 
policy  of  the  administration.  It  would,  moreover, 
have  served  to  disturb  industry  and  to  perplex  its 
leaders  at  a  time  already  sufficiently  disquieting, 
and  might  have  proved  but  an  aggravation  of  the 
disturbance  caused  by  the  war.  The  great  body 
of  the  customs  rates,  of  which  there  are  thousands 
on  the  tariff  schedules,  are  not  productive  of  much 
revenue  and  are  not  intended  to  be.  They  are  there 
to  restrict  importations.  These  certainly  could  not 
well  be  changed.  Of  the  bare  dozen  or  so  of 
articles  of  importation  which  do  yield  a  revenue, 
sugar,    one   of    the   most   important,  was  likely   to 


CHAP.  Ill   FINANCIAL   ADMINISTRATION   OF    WAR     453 

be  interfered  with  by  the  war.  At  the  existing 
rates,  sugar  imported  should  yield  a  revenue  of 
about  180,000,000  a  year,  but  at  least  half  of  the 
importation  was  jeopardised  by  the  war  itself,  and 
it  would  have  been  highly  impolitic  to  have  changed 
the  rate  of  this  time.  Iron,  which  was  once  a  source 
of  considerable  revenue,  was,  in  consequence  of  the 
changes  which  have  taken  place  in  that  industry 
and  of  the  protective  features  of  the  customs  law, 
not  available  to  provide  new  revenues,  as  the  im- 
portations are  at  best  small.  Cotton  goods,  the  tax 
upon  which  yields  considerable  revenue,  were  pro- 
tected ;  so  were  manufactures  of  hemp,  flax,  and 
jute,  of  leather  and  of  wool.  Drugs,  medicines, 
and  chemicals  were  already  taxed  up  to  the  limit 
of  productiveness,  from  a  revenue  point  of  view.  In 
short,  there  were  but  four  important  articles  im- 
ported which  might  be  used  to  yield  additional 
revenue.  These  were  hides  and  skins,  raw  silk, 
tea,  and  coffee.  To  tax  hides  and  skins  or  raw  silk 
would,  probably,  under  the  prevailing  theory  of 
'*  compensatory  "  duties,  have  involved  an  increase 
in  the  rates  on  the  products  manufactured  from 
them,  to  maintain  the  same  degree  of  protection 
that  those  products  now  enjoy.  That  would  have 
reopened  the  whole  tariff  controversy,  and  have  ren- 
dered the  outcome  of  the  war  revenue  measure 
extremely  doubtful.  Clearly  it  were  wisest,  con- 
sidering how  recently  the  tariff  issue  had  been  tem- 
porarily settled,  to  leave  them  alone.     As  a  matter 


454      '    INTRODUCTION   TO  PUBLIC  FINANCE    part  iv 

of  fact,  then,  there  are  only  two  articles  in  the  whole 
list  of  importations  which  might  be  considered  by 
the  Secretar}^  of  the  Treasury  in  his  search  for  new 
income.  These  were  tea  and  coffee,  which  might, 
perhaps,  have  been  made  to  yield  together  nearly 
$80,000,000  additional  revenue.  That  was  approxi- 
mately all  that  could  be  expected  from  the  tariff. 

In  the  war  revenue  bill,  as  presented  to  the  House 
of  Representatives  by  the  committee  on  ways  and 
The  tax  mcaus,  of  which  Mr.   Dingley  was  chair- 

on  <ea.  man,   there  was  no  suggestion  of  using 

the  tariff  in  any  way  for  obtaining  additional  reve- 
nue. It  was  not  until  the  very  end  of  the  long 
discussion  of  the  measure  in  the  Senate  that  it  was 
proposed  to  put  a  duty  of  ten  cents  a  pound  on  tea. 
That  measure  passed  the  Senate  and  was  accepted 
by  the  conference  .between  the  two  Houses  and  by 
the  House  of  Representatives  without  any  public 
discussion  as  to  its  merits.  The  reason  for  this 
duty,  as  for  the  omission  of  coffee  from  the  list,  is 
therefore  not  clear.  The  tax  on  tea  was  an  important 
matter.  The  yield  would  have  been  over  $10,000,000 
per  annum.  A  similar  tax  on  coffee,  which  would 
liave  been  at  the  rate  of  8.5  cents  per  pound,  would 
have  yielded  about  170,000,000  more.  It  is,  therefore, 
somewhat  surprising  that  it  should  have  attracted  so 
little  attention  from  the  members  of  Congress. 

Sec.  7.  Since  the  revenue  from  the  tariff  was  not 
to  be  increased,  the  only  resource  available  was  in- 
ternal taxes.     That  these  internal  taxes  should  have 


CHAP.  Ill   FINANCIAL   ADMINISTRATION  OF   WAR     455 

taken  the  same  general  form  as  the  taxes  used  dur- 
ing the  Civil  War,  and  consequently  more   The  main 
or  less  familiar  to  people  and  officers,  was  '[^^'^"'"^^  ^"^ 
but  natural.     Under  the   stress   of  war  taxation. 
it   is   unwise   to   attempt   to  organise  entirely  new 
taxes,  such,  for  example,  as  an  income  tax.     Though 
an  income  tax  had  been  used  during  the  Civil  War, 
that  form  of  taxation  was  under  the  shadow  of  an 
adverse  decision  from  the  Supreme  Court.     Even  if 
an  income  tax  law  which  would  have  been  constitu- 
tional, according  to  the  recent  decision  of  the  court, 
could   have   been  drawn,'  it  is  doubtful  whether  it 
could   have   been  made  productive  within  any  rea- 
sonable period  of  time.     Recourse  might  have  been 
had  to  direct  taxes,  apportioned  among  An  income 
the  states  according  to  population.   These  ^^^  "^^ 
taxes  could  then  have  been  raised  in  any  ^o<  avaU- 
manner  which  the  state  authorities  chose.   "^^^• 
But   there   are   two   fatal  objections   to   this   plan. 
The   apportionment   of   taxes  according  to  popula- 
tion is    fundamentally  unjust  and  unequal.     What 
it   amounts  to   practically  is  a  graduated   poll-tax. 
The  different  commonwealths  vary  so  in  wealth  per 
capita  that  any  per  capita  tax,  however  raised,  would 
be  unfair.     Although  the  census  estimate  of  wealth 
in  1890  was  anything  but  satisfactory,  yet  the  method 
used  in  that  estimate  was  uniform  throughout  the 
country  ;  and  such  differences  as  that  between  South 
Carolina,  with  about  $350  per  capita^  and  Nevada, 
with  $4000  per  capita,  show  how  utterly  inadequate 


456         INTRODUCTION   TO  PUBLIC  FINANCE    part  it 

the  constitutional  method  of  raising  direct  taxes  has 
become.  Then,  again,  the  method  of  taxation  by 
which  most  of  the  states  raise  their  revenues,  and 
which  they  would  probably  follow  in  raising  their 
share  of  any  apportioned  taxes,  is  the  worst  in  use 
in  any  civilised  country,  and  the  injustice  of  the 
apportionment  would  have  been  enormously  in- 
creased by  the  injustice  in  collection.  The  second 
objection  to  this  method  of  raising  direct  taxes 
prescribed  by  the  Constitution  is  that  it  takes  an 
inordinate  length  of  time,  and  war  taxes  should 
begin  to  yield  a  revenue  as  early  as  possible. 

The  only  available  plan  was,  therefore,  to  seek 
additional  revenue  from  the  existing,  indirect,  inter- 
„      .  ,.  nal  taxes,  the  excises  or,  as  they  are  called 

Description  '  '  '^ 

of  the  new  in  the  United  States,  the  "internal  reve- 
taxes.  ^^^  „  ^g^jj^gg^  g^jjjj  ^Q  supplement  these  still 

further  by  new  taxes  of  the  same  sort.  Briefly  sum- 
marised, the  revenue  bill  nearly  doubled  the  existing 
rate  of  taxation  upon  beer  and  other  similar  fer- 
mented liquors ;  it  imposed  special  taxes  on  bankers, 
brokers,  pawnbrokers,  theatres,  circuses  and  other 
shows,  bowling-alleys  and  billiard  rooms ;  it  raised 
the  rates  on  tobacco  of  all  kinds ;  and  it  placed  stamp 
taxes  on  stocks  and  bonds,  commercial  papers,  legal 
documents,  checks  and  drafts,  proprietary  medicines, 
toilet  articles,  bills  of  lading,  insurance  policies,  and 
a  number  of  other  things.  Special  direct  taxes  were 
imposed  on  the  oil  trust  and  the  sugar  trust,  and  on 
legacies  and  distributive  shares  of  personal  property. 


CHAP.  Ill     FINANCIAL  ADMINISTRATION  OF   WAR    457 

Sec.  8.  As  the  war  revenue  bill  passed  the  House, 
its  probable  yield  was  variously  estimated  at  from 
190,000,000  to  1105,000,000  per  annum,  yidd  of 
the  former  being  the  better  estimate.  As  **^^  ^"^^«- 
amended  in  the  Senate  and  finally  adopted,  it  prom- 
ised to  yield  at  least  f  150,000,000  per  annum.  The 
actual  yield  in  addition  to  the  regular  revenue  dur- 
ing the  first  month  was  about  $13,000,000.1  But 
the  expenses  of  war  during  the  first  few  months,  if 
not  for  a  long  time  after  that,  would  be,  it  was 
estimated,  at  least  double  that  sum  and  possibly 
more.  Therefore,  unless  the  treasury  had  a  con- 
siderable balance  on  hand,  there  would  have  been 
no  possibility  of  conducting  the  war  at  all  without 
immediate  loans.  The  balance  in  the  treasury  at 
the  outbreak  of  the  war  was  $225,000,000.  Upon 
this  were  a  number  of  claims,  some  of  The  funds 
which,  however,  were  not  immediate.  o,i^f^^(Me. 
$100,000,000,  known  as  the  gold  reserve,  had  to  be 
held  for  the  preservation  of  the  parity  of  all  parts  of 
the  circulation  and  the  avoidance  of  general  financial 
ruin.  Then  there  were  $13,000,000  of  fractional 
silver  and  minor  coins,  a  large  part  of   which  was 

1  It  is  not  possible,  and  probably  never  will  be  possible,  to  state 
exactly  how  much  the  new  taxes  increased  the  revenues.  In  the 
first  place  the  reports  do  not  segregate  the  income  obtained  from 
the  new  taxes  from  that  obtained  from  the  old ;  and  in  the 
second  place  the  changes  in  the  rates  and  the  existence  of  new 
taxes  have  changed  the  yield  of  the  older  parts  of  the  system 
by  an  amount  which  cannot  even .  be  estimated.  The  total 
increase  in  the  revenues  for  the  fiscal  year  1899  over  1898  was 
about  $115,000,000. 


458         INTRODUCTION   TO  PUBLIC  FINANCE    part  iv 

worn  and  unavailable,  while  the  rest  was  needed 
for  currency  purposes  throughout  the  country. 
$14,000,000  had  been  received  from  the  sale  of 
the  Pacific  railroads  ;  but  although  this  sum  was 
temporarily  available,  it  would,  if  it  were  spent, 
be  necessary  to  raise  an  equivalent  amount  before 
January  1  to  meet  the  Pacific  Railroad  bonds 
which  came  due  at  that  time.  $33,000,000  were 
held  in  trust  for  the  redemption  of  the  notes  of 
national  banks  which  had  failed  or  which  were 
redeeming  their  circulation.  A  part  of  this  was 
temporarily  available,  but  it  would  be  necessary  to 
replenish  that  fund  at  an  early  date  if  much  were 
drawn  from  it.  There  were,  then,  out  of  the 
1225,000,000,  1160,000,000,  of  which  a  small  part 
only  was  available,  and  that  but  for  a  short  time. 
Anything  drawn  upon  that  would  have  to  be  re- 
placed by  January  1  at  latest.  Of  the  $65,000,000 
remaining,  $40,000,000  were  necessary  as  the  cash 
on  hand  for  the  ordinary  operations  of  the  govern- 
ment. That  amount  corresponds  to  the  cash  on 
hand  which  a  merchant  keeps  in  the  till  to  make 
change  or  to  meet  small  bills.  This  left  but 
$25,000,000  for  the  initial  expenses  of  the  war, 
which  in  the  state  of  unpreparedness  would  natu- 
rally be  above  the  average.  This  $25,000,000  was  all 
the  unincumbered  money  in  the  treasury  to  meet  the 
appropriation  of  $50,000,000  made  by  Congress  be- 
fore war  was  declared.  It  was  clear  that  the  Sec- 
retary of  the  Treasury  could  not  provide  the  sinews 


CHAP.  Ill    FINANCIAL  ADMINISTRATION  OF   WAR     459 

of  war  without  the  power  to  borrow,  both  for  a 
short  time,  to  anticipate  the  revenues  expected  from 
the  new  taxes,  and  for  a  long  time,  to  enable  him  to 
support  any  naval  and  military  operations  which 
might  become  necessary,  however  extensive. 

Sec.  9.  After  much  discussion  and  more  or  less 
unnecessary  and  dangerous  delay,  especially  in  the 
Senate,  Congress  authorised  the  borrow-    ^  ,^    ., 

^  Authority 

ing,  at  the  discretion  of  the  administra-  to  borrow 
tion,  of  not  more  than  $100,000,000  at  ^""^'"'^■ 
one  time  on  treasury  certificates  and  of  an  amount 
not  to  exceed  $400,000,000,  on  10-20  bonds  at  3  per 
cent.  Nominally,  therefore,  the  Secretary  of  the 
Treasury  had  in  his  hands  for  the  necessities  of  war 
during  the  first  six  months  of  its  duration  : 


Surplus  on  hand 
War  revenues    . 
Temporary  loans 
Bonds 

Total      . 


$  25,000,000 

75,000,000 

100,000,000 

400,000,000 


600,000,000 


Practically,  he  was  limited  by  the  fact  that  all  of 
this  money  had  not  been  appropriated,  and  it  would 
have  been  folly  to  raise  more  than  he  had  authority 
to  spend.  Including  the  $50,000,000  appropriated 
before  the  war  broke  out,  the  total  war  appropriations 
made  by  Congress  before  it  adjourned  amounted  in 
all  to  $361,788,095.11.  This  sum  covered  the  most 
generous  estimates  of  the  probable  cost  of  the  war. 


460        INTRODUCTION  TO  PUBLIC  FINANCE    part  iv 

But  the  secretary  did  not  deem  it  necessary  to  raise 
Determina-  at  oncc  a  sum  cqual  to  the  total  appro- 
tiono/the         priations.     It  was  estimated  that  the  ex- 

amount  to  be       ^ 

borrowed.  pcnscs  for  the  first  six  months  would  not 
exceed  1175,000,000,  or  about  one-half  of  the  appro- 
priations. The  new  taxes  would  probably  yield 
about  $75,000,000  toward  these  necessities,  and  a 
loan  of  1100,000,000  would  possibly  have  sufficed 
to  meet  all  the  demands.  But  the  treasury  raised 
1200,000,000  by  the  sale  of  3  per  cent  10-20 
bonds,  obtaining  a  total  of  1275,000,000,  or  nearly 
1100,000,000  in  excess  of  the  probable  actual  expendi- 
ture. The  accumulation  of  this  surplus  was  not  in  any 
sense  an  extravagant  or  useless  piece  of  financiering. 
As  has  already  been  explained,  the  treasury  must 
be  prepared  to  meet  any  demand  that  may  arise, 
instantly  and  amply.  That  is  the  imperative  ne- 
cessity. As  the  early  close  of  the  war  could  not 
have  been  foreseen,  the  fiscal  preparations  were 
necessarily  liberal.  Indeed,  the  amplitude  of  the 
funds  available  was  one  of  the  most  potent  causes 
of  the  success  of  the  war.  The  excess  raised  was 
not  larger  than  was  necessary  to  insure  the  instant 
readiness  of  the  treasury  to  meet  all  possible  de- 
mands. Had  the  war  continued  and  the  demands 
equalled  the  appropriations,  the  treasury  would 
again  have  been  obliged  to  use  its  power  of  borrow- 
ing which  the  fortunate  termination  of  the  war 
rendered  unnecessary. 

Sec.  10.    It  now  remains  to  see  how  the  credit  of 


CHAP,  III   FINANCIAL  ADMINISTRATION  OF   WAR      461 

the  nation  was  protected  and  how  it  stood  the  strain. 
At  the  end  of  April,  1898,  the  interest-bearing  debt 
of  the  United  States  amounted  in  round  numbers  to 
$847,000,000.     $100,000,000  of  this  bore   ,,     ,,, 

'         '  Use  of  the 

interest   nominally   at   5   per   cent,   the  power  to 
balance  at  4  per  cent.     The  4  per  cent  ^^"™'  "!'^ 

■^  ^  preservation 

bonds,  payable  in  1925,  were  quoted  when  of  the  ■public 
the  plans  were  being  made  for  placing  the  '^^'^^• 
new  loan  at  11 7 J.  At  that  rate  they  would  yield 
the  investor  3J  per  cent  interest.  There  was,  there- 
fore, some  surprise  when  it  was  proposed  to  place 
the  new  loan  at  3  per  cent.  It  was  urged  that 
nobody  would  buy  the  new  bond  at  3  per  cent 
when  he  could  buy  one  of  the  old  ones  and  get 
3^  per  cent.  Yet  the  outcome  showed  the  wis- 
dom of  the  move.  The  bonds  were  subscribed  to 
seven  times  over,  and  in  a  short  time  rose  to  a  pre- 
mium of  103  and  105.  In  fact,  the  entire  loan  was 
easily  placed  on  far  better  terms  than  any  nation 
has  ever  before  been  able  to  obtain  in  time  of  war. 
This  remarkable  result  was  attained  partly  by  reason 
of  the  fact  that  the  loan  was  offered  for  popular 
subscriptions  and  the  bonds  were  for  small  amounts, 
thus  creating  and  reaching  a  new  market  among 
investors  of  small  means.  In  part,  too,  it  was  due 
to  the  fact  that  the  new  bonds  at  par  really  formed 
a  better  basis  for  the  national  bank-note  circulation 
than  the  old  bonds  at  117J,  and  very  much  better 
than  the  old  bonds  at  123^,  the  price  which  was 
reached   before  the  new  issue  was  completed.     An 


462        INTRODUCTION  TO  PUBLIC  FINANCE     part  n 

investment  by  a  national  bank  of  'f  100,000  in  the  old 
bonds  at  117|  would  yield  a  profit  of  1736.70  on  the 
circulation,  if  interest  is  at  6  per  cent ;  while  an 
investment  of  the  same  amount  in  the  new  bonds 
at  par  would  yield  a  profit  on  the  circulation  of 
?|1302.02.  The  difference  in  favour  of  the  new 
bonds  was  $565.32,  or  over  half  of  1  per  cent. 
The  advantage  was  still  greater  when  the  old  4's 
reached  127 J,  as  they  did  before  the  close  of  the 
war.  None  of  these  influences,  however,  would  have 
had  any  weight  had  it  not  been  that  new  revenues 
sufficient  to  meet  all  debt  charges  and  part  of  the 
war  expenses  had  been  provided. 

Sec.  11.  Much  interest  centres  around  the  suc- 
cessful attempt  to  make  this  a  popular  loan,  and 
A"'pojm-  as  this  was  one  of  the  features  which 
lav'' loan.  contributed  to  strengthen  the  credit  of 
the  country  at  this  time,  we  may  examine  it  some- 
what in  detail.  Congress,  after  much  discussion, 
finally  provided  that  these  3  per  cent  bonds,  "re- 
deemable in  coin  at  the  pleasure  of  the  United 
States  after  ten  years  from  the  date  of  their  issue, 
and  payable  twenty  years  from  that  date,"  should 
"be  first  offered  at  par  as  a  popular  loan  under 
such  regulations,  prescribed  by  the  Secretary  of  the 
Treasury,  as  will  give  opportunity  to  the  citizens  of 
the  United  States  to  participate  in  the  subscriptions 
to  such  loan,  and  in  allotting  such  bonds  the  several 
subscriptions  of  individuals  shall  be  first  accepted, 
and  the  subscriptions  for  the  lowest  amounts  shall 


CHAP.  Ill    FINANCIAL   ADMINISTRATION  OF   WAR     46S 

be  first  allotted."  Before  the  bill  was  finally  passed^ 
offers  had  been  made  by  various  banking  houses 
to  take  the  whole  issue  at  a  slight  premium.  Both 
Congress  and  the  administration,  however,  favoured 
the  experiment  of  interesting  a  large  number  of 
small  property-owners  in  the  loan,  even  at  a  loss 
to  the  government.  It  was  thought  that  such  a 
measure  would  strengthen  the  national  credit  by 
giving  expression  to  the  faith  of  our  own  people 
in  the  integrity  of  the  government.  Other  con- 
siderations  of  a  political  character  also  entered  in, 
but  with  them  we  are  not  concerned.  As  a  financial 
measure  for  the  strengthening  and  support  of  the 
public  credit  it  proved  a  phenomenal  success. 

The  bonds  were  issued  in  denominations  as  low 
as  i20.  Subscriptions  were  received  through  the 
post-office,  and  every  hona  fide  subscription  under 
$500  was  immediately  accepted.  More  than  half 
of  the  entire  issue  was  taken  by  230,000  of  these 
small  subscriptions,  and  no  subscription  of  more 
than  14500  was  accepted.  In  all  320,000  persons 
offered  or  made  subscriptions,  and  the  total  amount 
tendered  the  government  was  $1,400,000,000.  This 
rush  for  the  new  bonds  was  not  merely  y,^^  ^^^^ 
a  matter  of  patriotism  or  sentiment,  for  the  new 
During  the  progress  of  the  subscriptions 
the  price  of  the  bonds  advanced  first  to  102  and 
finally  to  105J.  They  now  stand  at  about  110. 
The  lucky  individuals  whose  subscriptions  were 
accepted  made  from  3  per  cent  to  5  per  cent  in  a 


464         INTRODUCTION   TO  PUBLIC  FINANCE    part  iv 

few  days.  The  popularity  of  these  bonds  was 
greatly  enhanced  by  the  standing  offers  obtained 
by  Secretary  Gage  from  two  syndicates  to  take  the 
entire  loan  or  any  part  of  it  that  was  not  covered  by 
the  popular  subscriptions. 

This  method  of  floating  the  loan  will  cost  the 
government  a  considerable  sum  of  money.  In  the 
first  place  a  possible  premium  is  lost.  How  much 
The  cost  of  ^^^^  premium  would  have  been  cannot 
the  popular  be  estimated  because  the  bonds  were  sold 
""^^'  in  a  broader  market   than   would  have 

otherwise  existed.  But  it  would  have  been  at  least 
2  per  cent,  for  even  at  a  higher  rate  the  bonds 
offer  a  favourable  basis  for  national  bank-note 
circulation.  That  is,  at  least  84,000,000  was  lost 
at  the  beginning.  Then  the  cost  of  handling  the 
loan,  paying  the  interest,  etc.,  is  increased  consid- 
erably by  the  small  size  of  the  bonds  and  the  large 
number  of  holders.  It  is  just  as  much  trouble  to 
pay  the  15-cent  coupon  of  a  $20  bond  as  it  is  to  pay 
the  -175  coupon  of  a  $10,000  bond.  Yet  in  spite  of 
all  this,  the  placing  of  the  $200,000,000  loan  of  1898 
was  one  of  the  most  successful  pieces  of  financiering 
ever  accomplished  by  the  government.  It  demon- 
strated the  perfect  solvency  of  the  government;  it 
gave  the  country  a  financial  prestige  which  went  a 
long  way  toward  hastening  the  end  of  the  war ; 
and  it  so  strengthened  credit  of  the  government 
that,  had  the  war  unfortunately  continued,  it  would 
have  been  able  to  obtain  funds  to  almost  any  amount 


CHAP.  Ill    FINANCIAL  ADMINISTRATION   OF   WAR     465 

on  the  most  favourable  terms  imaginable.  With  a 
3  per  cent  bond  selling  at  105  during  the  actual  con- 
tinuance of  military  operations,  a  nation  may  safely 
regard  its  credit  as  unimpaired. 

The  final  test  of  the  success  of  the  financial 
administration  of  a  war  is  the  preservation  of  the 
public  credit. 


2h 


BRIEF   BIBLIOGRAPHY   FOR   SUPPLE- 
MENTARY  READING 

Adams,  H.C.     Public  Debts.     N.Y.,  1887. 

Adams,  H.  C.     The  Science  of  Finance.     N.Y.,  1898. 

Hastable,  C.  F.     Public  Finance  3d  ed.,  enl.     The  Macmillan 

Co.,  1903. 
Bullock,  C.  J.,  Editor.     Selected  Readings  in  Public  Finance, 

Boston,  1906. 
CoBDEN   Club   Essays.     Local    Government  and    Taxation. 

London  and  N.Y.,  1875. 
CoHN,  G.     System  der  Nationaloekonomie,  2ter  Band,  Finanz- 

wissenschaft.     Stuttgart,    1889.     Partial    Translation    by 

Veblen,  T.  B.     Chicago,  1895.     [Economic  Studies  of  the 

University  of  Chicago.] 
CooLEY,  T.  M.     Law  of  Taxation,  2d  ed.,  enl.     Chicago,  1886. 
CossA,  L.     Primi  eleniente  di  scienza  delle   finanze,  3d  ed. 

Milan,  1882.     Translation  by  Horace  White,  with  notes. 

N.Y.  and  London,  1891. 
Daniels,  W.  M.     The  Elements  of  Public  Finance.    N.Y., 

1899. 
Dowell,   S.     History   of    Taxation   and   Taxes   in   England. 

4  Vols.    2d  ed.     London  and  N.Y.,  1885. 
Eheberg,  Finanzwissenschaft,  8th  ed.     Leipzig,  1906. 
Ely,  R.  T.,  and  Finley,  J.  H.     Taxation  in  American  States 

and  Cities.     N.Y.,  1888. 
Goschen,  G.  J.     Reports  and  Speeches  on  Local  Taxes.    Mac- 
millan and  Co.,  1872. 
Hock,  C.   F.  von.     Finanzen   und   die   Finanzgeschichte   der 

Vereinigten  Staaten  von  Amerika.     Stuttgart,  1867. 
466 


BIBLIOGRAPHY  467 

Leroy-Beaulieu,  p.     Traite  de  ]a  Science  des  Finances.     6th 

ed.     Paris,  1899. 
Marzaxo,   F.     Compendio  di  scienza  delle  finanze.     2d  ed. 

Turin,  1887. 
McCuLLOCH,  J.  R.     Taxation  and  the  Funding  System.    3d 

ed.     London,  1863. 
De  Parieu,  F.  E.     Traite  des  impots.     5  tomes.     Paris,  1862. 

[First  'edition  in  five  vohimes  better  than  the  second  in 

four,  1866-7.] 
Rau,    K.    H.     Grundsatze    der    Finanzwissenschaft.     3d    ed. 

Heidelberg,  1850. 
Roscher,    W.     System  der  Finanzwissenschaft.     3d  ed.,  enl. 

Stuttgart,  1886.     5th  ed.  revised  by  Gerlach,  1901. 
Say,  L.,  Editor.     Dictionnaire  des  finances.     Paris,  1889-94. 
ScHONBERG,  G.,  Editor.     Handbuch  der  National  Oekonomie, 

3ter  Band.     Tubingen,  4th  ed.,  1897-98. 
Schanz,  G.    Finanz  Archiv,  A  periodical.    Stuttgart,  since  1884. 
Schwab,   J.    C.     History   of   the   New    York   Property   Tax. 

American  Economic  Assoc^  1890. 
Seligman,  E.  R.  A.     Essays  in   Taxation.     The  Macmillan 

Co.,  1895. 
Seligman,  E.  R.  A.     Finance  Statistics  of  the  American  Com- 
monwealths.    Boston,  American  Statistical  Assoc,  1889. 
Seligman,  E.  R.  A.     Progressive    Taxation   in    Theory   and 

Practice.     American    Economic     Assoc,    1894.     Revised 

1908. 
Seligman,  E.  R.  A.     Shifting  and  Incidence  of   Taxation. 

2d  ed.,  enl.     The  Macmillan  Company,  1899. 
State  and  Local  Taxation.     Addresses  and  Proceedings  of 

two  Conferences  1907  and  1908,  held  under  the  Auspices  of 

the  National  Tax  Association.     The  Macmillan  Co.,  New 

York,  1908  and  1909. 
Stein,  L.  von.     Lehrbuch  der  Finanzwissenschaft.     5te  Auf- 

lage.     Leipzig,  1885. 
Vignes,  E.    Traite  des  impots  en  France.    2  tomes.    Paris,  1880 


468  BIBLIOGRAPHY 

Wagner,   A.     Finanzwissenschaft.     Leipzig,   Vol.   I.   3d  ed.^ 

1883;  Vol.  IL  2d  ed.,  1890;  Vol.  III.,  1889.     Erganzungs- 

heft,  1896;  Vol.  TV.,  1899. 
Wells.     Theory  and  Practice  of  Taxation,  N.Y.,  1900. 
Wilson,   A.  J.     The  National   Budget,  the    National  Debt, 

Taxes   and   Rates.     English    Citizen    Series.     Macmillan 

and  Co.,  1882. 

OTHER   BIBLIOGRAPHIES 

[Most  of  the  larger  treatises  mentioned  above  contain  nu- 
merous references  and  many  bibliographies.  The  following  lists 
of  books  are  easily  available  for  English  and  American  stu- 
dents.] 

White's  translation  of  Cossa's  Taxation.     Pp.  181-193. 
Bowker   and  lies.     Headers'   Guide   in  Economic,  Social  and 

Political  Science.     Putnam,  1891.     Pp.  66-73. 
Seligman*s   Essays   in   Taxation.     Pp.  62,   63,   and  263,   264- 
Stammhammer,  Bibliographie  der  Finanzwissenschaft,  Jena 

1903. 


INDEX 


Abatements,  British  income  tax, 
324;   Prussia,  320. 

Ability  defined,  145  flf.  See 
Faculty. 

Accise,  159  n. 

Accounts,  England,  439;  local, 
443;  public,  interpretation  of, 
439  ff.;    United  States,  441. 

Acquisition,  taxes  on,  113. 

Adams,  H.  C,  2  n.,  8,  385  n., 
386  n.,  393  n. 

Adcisio,  159  n. 

Administration,  fiscal,  11,  415  ff. 

Administrative  expenditures,  31, 
39;  concept  of  direct  and  in- 
direct taxes,  108;    local,  41. 

Administrative  fees,    115,   351. 

Ad  valorem,  defined,  121 ;  duties, 
227. 

Aide,  81,  162. 

America,  see  United  States,  and 
General  property  tax. 

American  colonies,  taxes  in,  170. 

Amortisation  of  real  estate  taxes, 
202. 

Andrews,  E.  B.,  118. 

Annuities,  366  ff.  See  Debts, 
public. 

Anti-Corn  Law  League,  232. 

Apportioned  rate  defined,  122. 

Appropriations,  committee  of 
United  States  Congress  on,  421. 
See  Budget. 

Aristotle,  18. 

Armorial  bearings,   tax  on,   206. 

Army,  53.     See  Military, 

Art  of  public  finance,  4. 

Assessment,  defined,  129;  direct 
taxes,  433;  general  property 
tax,  286,  434;  ibid.,  date  of, 
265;   land,  296;    roll,  269,  270. 


Asylums,  268. 

Athens,  expenditures  in,  24. 

Athletic  clubs,  12  ff. 

Audit,  see  Control. 

Auditors,  United  States,  424  ff, 

Axifwandsteuern,  204  ff. 

Austria,     debt    of,    368;    export 

duties,  220;   public  lands,  360; 

tobacco  monopoly,  217, 

Back- tax  commissions,   259, 

Bank  stock,  263. 

Base  defined,  120  ff. 

Bastable,   7,   8,   8  n.,   12  n.,   28, 

55,  112,  113,  218  n.,  301,  302  n., 

339  n.,  371,   379,  386  n.,  415, 

424  n. 
Bede,  81,  156. 
Beer,     taxes     on,     204     ff.     See 

Excises. 
Belgium,  debt  of,  368. 
Benefit,  common  and  special,  84; 

theory,  103  ff.,  141,  143  ff. 
Benevolences,  81,  164,  167. 
Berlin  and  Milan  decrees,  239. 
Besitz,  113. 
Betterments,  76,  355.    See  Special 

assessments. 
Bibliography,  8,  466, 
Blackstone  on  equality,  103  n. 
Bluntschli,  3  n. 
Boeckh,  24  n. 
Boer  War,  54. 
BoUes,  2  n. 
Bonds,  sale  of,  402 ;  taxation  of, 

300.     See  Debt,  public. 
Bounties,  70,     See  Protection. 
Bowring,  178  n. 
Bridges,  56. 
British    Empire,    debt    of,    368; 

income  tax,    112,    126;    policy 


469 


470 


INDEX 


1 


toward  colonies,  238.  See  Eng- 
land. 

Bryce,  252  n. 

Buckley,  439  n. 

Budget,  England,  418;  United 
States,  420  ff.  See  Control  and 
audit. 

Buildings,  public,  48  ff. ;  tax,  184, 
298,  343. 

Bulgaria,  debt,  368, 

Bullock,  108,  108  n.,  109  n.,  310, 
331  n. 

Burgess,  J.  W.,  19  n. 

Business  taxes,  96,  247. 

Cadastre,  109,  131,  296  ff.  See 
Land  tax. 
^California,  abuse  of  legislative 
expenses,  48;  definition  of 
value,  272;  inheritance  tax; 
306  ff.;  mortgage  tax,  199, 
276,  337;  revenue  commission, 
278-9;  valuation  of  improve- 
ments, 273. 

Cameralists,  5,  6,  40. 

Canals,  56. 

Canons  of  taxation,  338. 

Capital,  taxation  of,  299,  344  ff. 

Capitalisation  of  taxes,  202. 

Capitation  tax,  159,  160.  See 
Poll  tax. 

Carriages,  tax  on,  206. 

Carucage,  164. 

Cemeteries,  268. 

Census  Bureau,  United  States, 
33,  252  n.,  286  ff.,  289,  335  n., 
444  n. 

Central  control  in  general  prop- 
erty tax,  255  ff. 

Certainty  and  convenience, 
436. 

Charging  what  the  traffic  will 
bear,  118. 

Charities,  public,  62  ff.  See 
Poor  relief. 

Chart  of  assessment,  real  and 
personal  property  in  United 
States,  289. 

China,  debt,  368. 


Christian   doctrine   of   true   free- 
dom, 19. 
Churches,  268;    fees  of,  352. 
Cise,  159  n. 

City  taxes  in  Middle  Ages,  158. 
Civil  list,  England,  40. 
Civil     War,     United    States,     54, 

331  ff.,  412,  448. 
Classical  times,  80. 
Classification,  11,  15  ff. ;   of  debts, 

389;  of  fees,  114;    of  revenues, 

86;    of  taxes,  105  ff. 
Class  tax,  Prussia,  182. 
Cleveland,  2  n. 
Clocks,  tax  on,  206. 
Clow,  F.  R.,  35. 
Coal  duties,  England,  219. 
Coffee,  taxes  on,  210,  454. 
Cohn,    G.,    8,    11,    29,    120,    140, 

207  n.,  227,  227  n.,  374. 
Coinage  charges,  353. 
Colbert,  159,  215. 
Collateral    inheritance    tax,    303, 

304.     See  Inheritance  tax. 
Collection,  43,  431  ff.,  436. 
Colleges,  exempt,  268. 
Colonies,  American,  170. 
Comforts,  excises  on,  209. 
Commerce,  expenditures  for,   60. 
Commercial  fees,   115;    revenues, 

88,  90,  94,  98. 
Common  benefit,  14. 
Common  penny,  156. 
Commonwealth  legislatures, 

United     States,     47;       sinking 

funds,  413. 
Compensatory  theory,  150. 
Comptroller,  United  States,  424  ff. 
Compulsion,  85. 
Compulsory  revenues,  90. 
Congress  and  the  budget,   420  ff . ; 

salaries  in,  46. 
Connecticut  proprietors,  146. 
Conrad,  227  n. 
Constitution,    United    States,    on 

direct  taxes,  109;    on  taxation 

in    general,    331 ;     income  tax, 

amendment  to,  334  n. 
Constitutionalism,  effect  on  reve- 


INDEX 


471 


nues,  82  ff. ;  relation  to  ex- 
penditures, 27. 

Consular  service,  42, 

Consumption,  taxes  on,  113,  162, 
182,  205. 

Contractual  debts,  388 ;  revenues, 
88,  90. 

Contribution  des  patents,  192  ff. 

Control  and  audit,  423,  424;  of 
the  purse,  417. 

Convenience  of  contributors,  436. 

Conventional  tariff  of  France,  236, 
237. 

Conversion  of  debt,  404. 

Cooley,  103  n.,  143. 

Copyrights,  32. 

Corn  laws,  England,  231. 

Corporate  interests,  94. 

Corporation  franchises,  280  ff . ; 
privileges,  32;  taxes,  199, 
247,  301. 

Car  vie,  161. 

Court  of  Claims,  United  States, 
426. 

Crane  and  Moses,  3  n. 

Credit,  371  ff. ;  in  time  of  war, 
449. 

Credits,  taxation  of,  278  ff. 

Criminal  classes,  62,  66. 

Crop  exemptions,  265. 

Currency,  expense  of  maintaining, 
60. 

Customs  duties,  204  ff.,  218  ff . ; 
collection  of,  432;  effect  of,  on 
trade,  222;  England,  165, 
233;  France,  235  ff . ;  German 
Empire,  234;  history  of,  in 
England,  229  ff. ;  incidence 
of,  341 ;  who  bears  burden  of, 
225;  yield  of,  220;  United 
States,  237  ff . ;  Virginia,  173; 
union,  Germany,  233.  See 
Protection. 

Daneqeld,  162. 
Daniels,  8,  277. 

Death   duties,  302.    See  Inherit- 
ance taxes. 
Debts,  public,  366  ff.;    classified, 


389;  contractual,  388;  growth 
of,  367 ;  negotiation  of,  401  ff. ; 
payment  of,  405;  payment  of, 
in  United  States,  413;  pay- 
ment of  interest  on,  401  ff.; 
size  of  national,  366;  of  the 
treasury,  396. 

Declaration  of  taxpayers,  435. 

Defence,  50  ff. 

Deficiency  bills,  423. 

Deficit  financiering,  371. 

Definitions,  arbitrary  for  general 
property  tax,  267 ;  ad  valorem, 
121;  apportioned  rate,  122; 
assessment,  129 ;  base,  120  ff. ; 
credit,  372;  degressive  rate, 
124  ff. ;  disproportionate  rates, 
123;  excise,  128;  finance  and 
fiscal,  1  n.,  2  n. ;  impost,  128; 
incidence,  128;  internal  reve- 
nue tax,  128;  levy,  129;  pro- 
gressive rates,  123;  public 
finance,  1;  rate,  122;  shifting, 
128;  specific,  121;  special  as- 
sessments, 115;  tax  list,  130; 
terms  relating  to  revenues, 
103  ff. ;   toll,  128. 

Degressive  rates,  124,  125. 

Delaware,  270  n. 

Denmark,  debt,  368. 

Departments,  United  States  fed- 
eral government,  425  ff. 

Dependent  character  of  public 
finance,  3. 

Deposits  in  public  banks,  389. 

Derivative  revenues,  90. 

Dewey,  D.  R.,  2  n. 

Dimes,  159,  161. 

Dingley  tariff,  242-3. 

Diplomatic  service,  31,  42. 

Direct  taxes,  assessment  of,  433; 
defined,  107  ff. ;  in  France,  189; 
list  of,  110.     See  Classification. 

Disbursing  officers,  United  States, 
429. 

Disproportionate  rate  defined,  123. 

Distribution,  taxes  on  the  shares 
in,  176. 

Diversification  of  industries,   70 


472 


INDEX 


Division  of  labour  in  relation  to 
revenues,  79. 

Divisions  of  the  subject,  9. 

Dog  tax,  205,  206. 

Domains,  81,  116. 

Dona,  81. 

Donations,  defined,  98. 

Donative  monies,  157. 

Douglas,  172  n. 

Droit  de  patent,  192  ff. 

Duties,  transit,  218.  See  Cus- 
toms. 

"Earned"  income,  English  in- 
come tax,  324,  330. 

Earnings  and  wages,  215. 

Economic  effect  of  public  bor- 
rowing, 380  ff. 

Economic  rent,  135  ff.  See  Single 
tax. 

Economics  as  related  to  public 
finance,  3. 

Edgeworth,  105  n.,  150. 

Education,  31,  56  ff.,  57,  58. 

Educational  exemptions,  268 ; 
fees,  351. 

Egypt,  381  n. 

Ely,  R.  T,,  84  n. 

Embargo,  239. 

Eminent  domain,  93. 

England,  budget,  418;  coal 
duties,  219;  control  and  audit, 
423;  cost  of  collecting  rev- 
enues, 43;  cost  of  defence 
against  Orient,  51 ;  customs 
system,  yield,  233;  debt,  368; 
educational  fees  in,  351 ; 
excises,  211,  212  n.;  expen- 
diture for  education,  57; 
free  trade,  73;  history  of  cus- 
toms in,  229  ff. ;  house  tax, 
196;  income  tax,  168  ff.,  321 
ff.;  inheritance  tax,  196,304; 
land  tax,  167;  legislative  ex- 
penses, 45;  Hcenses,  211,  212  n. ; 
military  system,  51  ff. ;  poor 
rates,  86;  public  accounts, 
439;  revival  of  protection 
sentiment,    73;    sinking    fund. 


407  ff. ;    taxes  in  early  times, 
162;   tax  reforms  of  1840-1850, 
194    ff.;     tax    reform    in,    180; 
tax    system,    196;    writers    on 
public    finance,     6;      yield    of 
customs,  220;    yield  of  excises, 
208,  210;  yield  of  salt  tax,  215. 
See  Great  Britain. 
"Enumerated"  articles,  238. 
Equal  burden,  13. 
Equality,  political,  177;   of  taxa- 
tion, 103. 
Equalisation,    246  ff.,    435.     See 

General  property  tax. 
Erwerb,  113. 

"Estimates  "  in  England,  418  ff. 
Estimates  of  wealth,  291  ff. 
Exchequer  bills,  397,  397  n. 
Excises,  159  n.,  204  ff . ;  collection 
of,  433;  defined,  128;  methods 
of  assessment  and  collection, 
211;  New  York,  173. 
Excise  tax,  exclusive,  207;  in- 
cidence of,  341. 
Exemption  of  freemen,  153;  of 
minimum  of  subsistence,  143; 
under  general  property  tax, 
268,  269. 
Expenditure,  6,  7 ;  administrative, 
39 ;  administration  of  justice,  74 ; 
canals,  56 ;  classes  of,  30 ;  classi- 
fication of,  28 ;  ibid.,  by  United 
States  census  bureau,  33 ;  com- 
monwealth legislatures,  47 ; 
Congress  of  the  United  States, 
45;  common  benefit,  39;  cur- 
rency; 60;  early,  23;  educa- 
tion, 56;  18th  century,  23; 
evolution  of,  32;  in  excess  of 
income,  21 ;  exchanges,  mar- 
kets, etc.,  60;  hospitals,  67; 
items  of,  31;  judiciary,  48; 
legislatures,  44 ;  life-saving 
stations,  56;  lighthouses,  56; 
limits  of,  22;  local  councils, 
47;  museums,  libraries,  etc., 
59;  net,  39;  part  of  public 
finance,  10;  poor  relief,  62  ff. ; 
primary     schools,       59;       pri- 


INDEX 


473 


vate  industry  and  commerce, 
60;  "protection,"  73;  public 
buildings,  48,  49;  roads,  55; 
rivers,  56;  signal  stations,  56; 
sewers,  56;  technical  educa- 
tion, 58 ;  United  States  census 
classification  of,  37  ff . ;  uni- 
versity education,  58;  water- 
ways, 56;  weather  bureau,  56; 
weights  and  measures,  60. 

Export  duties,  219  ff. 

Extension  of  State  functions,  19. 

"  Extra-ordinary  "  expenses,  445. 

Evolution  of  rates  into  taxes, 
119;  of  taxes,  117. 

Faculty  theory,  103  ff.,  144  ff., 
148,  293;    in  Vermont,   147. 

Fairs,  60. 

Family  tax.  111.     See  Hearth  tax. 

Farmers  overtaxed,  431. 

Farming  taxes,  390. 

Federal  governments,  taxes  of, 
177. 

Fees,  344;  administrative,  115, 
351 ;  church,  352 ;  classifica- 
tion of,  114;  commercial,  115; 
defined,  88 ;  educational,  351 ; 
emerge  into  taxes,  349;  judi- 
cial, 115,  349;  legal,  349;  and 
public  functions,  348;  for 
State  industries,  353. 

Feudal  dues,  154,  155. 

Feudalism,  expenditures  under, 
26;  revenues  under,  80;  taxes 
under,  153. 

Fifteenths  and  tenths,   164,   166. 

Fillebrown,  136,  137. 

Fines,  93,  97. 

Firearms,  206. 

Fiscal  year,  422. 

Fiske,  129,  252  n. 

Five- twenties,  393. 

Floating  debt,  385. 

Folwell,  223  n. 

Forced  loans,  386. 

Forests,  116,  361. 

Forfeits,  97. 

France,      abolition      of      export 


duties,  220;  customs  duties, 
109,  235  ff.;  debt,  368,  370; 
development  of  tax  system, 
188  ff. ;  direct  taxes,  189 ;  excise 
taxes,  207,  210;  gabelle,  209; 
indemnity,  381 ;  indirect  taxes 
in,  188;  reforms  in,  180;  revo- 
lution in,  168,  189;  royal 
feudal  dues,  158;  sub-treasury 
system,  438;  tobacco-monop- 
oly, 116,  120,  215;  writers  on 
public  finance,  6;  yield  of 
excise  in,  208 ;  yield  of  salt  tax, 
215. 

Franchises,  280  ff . ;  defined,  281  ; 
special,  282  ff . 

Freeman  exempt,  154. 

Free  trade,  73,  223,  239 ;  in  land, 
146.     See  Protection. 

Full  cash  value,  272. 

Fumage,  163. 

Funded  debt  defined,  384:  in- 
come, 276. 

Funds  of  account,  442. 

Gabelle,  162,  209. 

Gallatin,  411  ff. 

Gardner,  H.  B.,  44  n. 

Geffcken,  56. 

General  property  tax,  246  ff. ; 
assessment  of,  434  ;  assessment 
of  personalty,  274 ;  assessment 
in  United  States,  286  ff . ;  de- 
fined, 96;  exemptions  tmder, 
268,  269;  incidence  of,  341  if.; 
New  England  type,  252;  objec- 
tions to,  284 ;  originally  a  local 
tax,  249;  ibid.,  a  personal  tax, 
.249;  Pacific  Coast  type,  259; 
preeminence  in  United  States, 
248;  Prussia,  186;  Southern 
type,  257 ;  under- valuation, 
272  ff.;  in  United  States  be- 
comes objective,  250;  ibid., 
property  subject  to,  262  ff. ; 
ibid.,  relation  to  other  taxes, 
247;    ibid.,  types  of,  251. 

General  revenues.  United  States 
Census  Bureau   definition,    94. 


474 


INDEX 


George,  H.,  134  ff.  See  Single 
tax. 

Germany,  abolition  of  export 
duties,  220;  cash  reserve,  370; 
customs  duties,  234;  customs 
union,  233;  debt,  368;  ex- 
cises, 208,  210;  forests,  361; 
indirect  taxes,  177;  military 
system,  51  ff. ;  public  lands, 
360 ;  writers  on  public  finance, 
6;  yield  of  customs,  220.  See 
Prussia  and  other  States  of. 
rifts,  93,  98. 

Go5elin,  363. 

Good-will,  284. 

Graduated  rates,  126. 

Grain  duty,  Germany,  234. 

Grants,  defined,  98. 

Great  Britain,  cost  of  adminis- 
tering justice,  75;  ibid.,  foreign 
intercourse,  43  ;  ibid.,  pensions, 
70 ;  ibid.,  public  buildings,  49  ; 
income  tax,  195,  321  ff . ;  old- 
age  pensions,  65;  poor  relief, 
64.     See  England. 

Greece,  debt,  368;  expenditures, 
23;    taxation,   153. 

Growth  of  interest  in  public 
finance,  7. 

Gvms,  tax  on,  206. 

Hadley,  118. 

Hair  powder,  tax  on,  206. 

Hall,  H.,  229  n. 

Hamilton,  A.,  410  ff. 

Hamilton,  R.,  408. 

Harbours,  56. 

Hardenberg,  reforms  of,  181. 

Hearth  taxes.  111,  163. 

Health,  protection  of,  61. 

Higgs,  107  n. 

Hill,  J.  A.,  317. 

Hinsdale,  252  n. 

Hoffman,  3  n. 

Holland,  general  property  tax  in, 

246. 
Home-market  argument,  72. 
Hospitals,  67, 
House  of  Representatives,  45. 


House  tax,   196,  206. 
Himgary,  debt,  368. 

Illinois,  valuation  of  property  in, 
273. 

Import  duties,  219.     See  Customs. 

Impost  defined,  128. 

Impot  fonder,  189,  190;  des 
patentes,  189;  sur  les  chevaux 
et  les  voitures,  190;  sur  les 
partes  et  fcnltres,  189.  See 
France. 

Improvements,  separately  valued, 
273. 

Incidence,  128,  336  ff. 

Incisio,  159  n. 

Incisura,  159  n. 

Income,  items  of,  defined  as  prop- 
erty, 267;  tax,  247;  tax, 
amendment  to  United  States 
Constitution,  334  n. ;  tax,  in 
American  commonwealths,  335 ; 
tax,  defined,  111;  tax,  Eng- 
land, 168,  321  ff.,  195;  tax, 
place  in  system,  316 ;  tax,  in 
Prussia,  183,  317;  tax,  as  single 
tax,  134 ;  taxes  in  United 
States,  331  ff. ;  tax.  Civil  War, 
109;  tax,  theory  of,  313;  tax, 
in  time  of  war,  455;  tax,  of 
United    States,   1894,  333. 

Increment  of  land  values,  tax  on, 
138. 

Indebtedness,  public,  366  ff. 
See  Credits,  Debt. 

India,  export  duties,  220. 

Indiana,  general  property  tax  in, 
253  ff. 

Indirect  taxes,  107  ff.,  110;  for 
federal  governments,  178;  in 
France,  188.  See  Direct  taxes, 
and  Classification. 

Individualism,  6,  19. 

Industrial  earnings,  32,  36,  77, 
94,98,347;    revolution,  175. 

Industries,  miscellaneous,  public, 
359,  362. 

Industry,  aid  of,  60,  70 ;  tax  on, 
in  Prussia,  184. 


INDEX 


475 


Inequalities  in  general  property- 
tax,  273. 

Infant   industries   argument,    71. 

Inheritance  taxes,  247,  302  ff . ; 
California,  306 ;  classification, 
110;  England,  196;  federal, 
in  United  States,  310;  justifi- 
cation of,  303;  Oklahoma, 
308;  purposes  of,  309;  in 
United  States,  305  ff.;  Wis- 
consin, 306. 

Inquisitors,  tax,  259. 

Insane,  62,  66. 

Insurance,  389;  old  age,  65. 

Interest  on  debt,  395,  401  ff.; 
place  of  payment,  403  ;  receipts 
from,  100;    taxes  on,  113. 

Internal  revenue  taxes,  128, 
213  ff . ;    in  time  of  war,   455. 

Invested  debts,  399. 

Investments,  government,  36, 
94,  98. 

Irredeemable  paper  money,  387. 

Italy,  220;  debt,  368;  tobacco- 
monopoly,  217. 

Japan,  debt,  368. 

Johnson,  404  n. 

Judgment    of    general     property 

tax,  293. 
Judicial  fees,  115,  349. 
Justice,  31,  48,  74. 
Justification  of  taxes,  83,  87,  103. 

Kandtorowicz,  227,  227  n. 
Kerhe,  159  n. 
Keynes,  8  n. 
Kidd,  19  n. 
Kinley,  439  n. 
Kinsman,  313,  335. 
Knies,  372. 

Labour,  receipts  from,  101. 

Laissez-faire,  6. 

Land,  free  trade  in,  146;  tax, 
295;  tax  in  England,  167;  tax, 
incidence,  344;  tax,  justifi- 
cation, 297 ;  tax,  Prussia,  181 ; 
values,  tax  in  investment,  138; 


ibid.,  single  tax  on,  135  ff.  See 
Real  estate.  Single  tax. 

Lands,  public,  359.  See  Do- 
main. 

"  Leave-them-as-you-find-them  " 
theory,  149. 

Legacy  and  succession  duties, 
302  ff.  See  Inheritance  taxes, 
Death  duties. 

Legal  fees,  349. 

Legal  persons,  292;  theory  of 
taxation  in  United  States,  143. 

Legislative  control,  417. 

Legislature,  expenditures  for,  31, 
44. 

Legoyt,  178  n. 

Leroy-Beaulieu,  7  n.,  189  n., 
386  n. 

Levasseur,  236  n. 

Levy,  231  n. 

Levy,  defined,  129;  a  legislative 
act,  130. 

Lexis,  227  n. 

Libraries,  59. 

Licenses,  96;  in  England,  211  n., 
212  n. 

Life  annuities,  394;  saving  sta- 
tions, 56. 

Lighthouses,  56. 

Limit  of  State  activities,  20. 

Liquors,  tax  on,  206.     See  Excise, 


List,  F.,  71. 

Loans,  386;     popular,  462.     Sea 

Debt. 
Local     councils,      47;      taxes    in 

England,  169;  taxes  in  Prussia, 

187. 
Lottery  loans,  395. 
Luxuries,  excise  on,  207,  209. 

Magna  Charta,  103  n.,  165. 

Maine,  80. 

Mainmorte,  taxes  des  Mens  de  la, 

190. 
Malchus,  12  n. 
Malthus,  63. 
Manufactures,     State,     77,    101 

See  Industries. 


476 


INDEX 


Markets,  60. 

Marquardt,  25  n. 

Marriage  licenses,  350. 

Marshall,  118. 

Maryland,  270  n. 

Masons,  268. 

Massachusetts,  General  Court  on 

faculty,  171 ;   mortgage  tax  in, 

276. 
Matches,    monopoly    in    France, 

217. 
Maximum  -  minimum        tariff 

France,   237;    in  general,   244, 

245. 
McCulloch,  231  n. 
McKinley  tariff,  242. 
McLeod,  373  flf. 
Measure  of  taxation,  85,  103. 
Menservants,  tax  on,  206. 
Method,  8,  9. 
Mexico,  139. 
Michigan,  255,  261. 
Military,  50  ff.,  53,  163. 
Mill,  J.  S.,  222  n. 
Mines,  116,  362. 

Minimum  of  subsistence,  142,  143. 
Ministry  in  England,  46. 
Minnesota,  261. 
Miquel,  185. 
Missouri,  260. 
Moffett,  S.  E.,  45. 
Money,  taxation    of,  277 ;    econ- 
omy,  176.     See  Currency. 
Monopolies,  control  of,  61 ;  prices, 

99  ;  of  State,  89. 
Montana,  266. 
More,  Sir  Thomas,  167. 
Morier,  181  n. 
Morrill  tariff,  240. 
Mortgages,  taxation  of,  199,  200, 

275  flf.,  300. 
Municipal  activities,  21. 
Museums,  59. 

National  banks,  263  ff . ;  debts, 
366  ff.,  368 ;  Municipal  League, 
35. 

Navigation,  56. 

Navy,  52. 


Nebenius,  372. 

Necessaries,  209. 

Necker,  215. 

Negotiating  loans,  401  ff. 

Netherlands,  debt,  368. 

Nevada,  274. 

New  England,    property  tax   in, 

171,  252. 
New  Jersey,  270  n. 
New  York,  274;    excises  in,  173; 

special  franchises,  267. 
Nicholson,  12  n.,  107  n. 
Non-intercourse  act,  239. 
Norway,  debt,  368. 

Objective  taxes,  112. 

Octrois,  162,  188,  192,  218. 

Odd  Fellows,  268. 

Ohio,  261. 

Oklahoma,  inheritance  tax,  308. 

Orders  in  Council,  239. 

Orient,  defence  against,  51. 

Paper  money,  387. 

Parieu,  161. 

Parliament,  cost  of,  45,  46;  ap- 
propriations for  education,  59. 

Patent  rights,  32. 

Patentes,  189  n. ;  impdt  des,  192  ff. 

Patriotic  loans,  386  n. 

Pauper  labour  argument,  72. 

Payne  bill,  244. 

Peace,  54. 

Peasant  revolt   in   England,  166. 

Penalties,  93,  97. 

Pennsylvania,  270  n. ;  inherit- 
ance tax,  305. 

Pensions,  31,  68  ff.,  69;  old  age, 
65. 

Perjury,  275. 

Permits,  96. 

Perpetual  bonds,  392.  See 
Debts. 

Personal  property  taxes,  110, 
111,  266,  292,  343.  See  Gen- 
eral property  tax. 

Personnelle  et  mohiliere,  189,  191. 

Pet  banks,  United  States,  439. 

Petitiones,  81. 


INDEX 


477 


Pharmacists,  190. 

Philippines,  export  duties,  220. 

Physiocrats,  6,  107,  134,  140. 

Picture  galleries,  59. 

Pitt,  168,  407,  423. 

Plate  glass,  206. 

Playing  cards,  207. 

Police,  55. 

PoUtical  equality,  177. 

PoUtical  science,  related  to  public 
finance,  3. 

Poll  tax,  96,  247,  312  ff. ;  in- 
cidence, 345;  Virginia,  173. 
See  Capitation. 

Poor,  15,31;  law,  England,  169 ; 
rates,  86;    relief,  62,  64. 

Popular  loan,  462,  464;  sub- 
scription, 401. 

Portes  et  fenHres,  192. 

Portugal,  debt,  368. 

Possession,  taxes  on,  113. 

Post,  L.  F.,  135. 

Post  office,  32,  357,  358;  fees, 
357;   orders,  389. 

Powers,  L.  G.,  33. 

Price,  B.,  407. 

Prices,  88,  99. 

Primary  schools,  59. 

Printing,  pubUc,  46. 

Private  enterprise,  control,  60. 

Privileges,  97,  100. 

Probyn,  181. 

Productive  agents,  tax  on,  176. 

Productive  loans,  398. 

Produit  net,  107. 

Profits,  taxes  on,  113. 

Progressive  rates,  defined,  123; 
theory  of,  149,  151. 

Property  and  income  tax,  Eng- 
land, 195,  321;  taxes,  95,  96, 
110,  111,   198,  295  ff. 

Proportional  rates,  defined,  122. 

PropriitS  bAtie,  190. 

Protection,  70  fT.,  73,  220  fT.  See 
Customs,    Free  trade. 

Prussia,  general  property  tax, 
246;  income  tax,  127,  317, 
318,  320;  property  tax,  186; 
public   lands,   361 ;    reform   of 


local  taxation,  187 ;  tax  reform, 
180,  181,  184  ff. 

Public  accounts,  439,  441 ;  audit, 
429;  borrowing,  380;  build- 
ings, 31,  48,  49,  60;  credit, 
378,  379,  381 ;  debts,  forms  of, 
383;  finance,  relations  of,  5; 
industries,  359;  lands,  359; 
service  enterprises,  116. 

Publican,  Roman,  431. 

Pure  food,  61. 

Quarantine,  67. 
Quit  rents,  171. 

Railways,  taxes  on,  257;  State 
ownership,  364. 

Rates,  meaning  government  mo- 
nopoly charges,  88,  89  n.,  101, 
116,  122,  131;  tax,  120  ff . ; 
the,  in  England,  131. 

Rau,  108,  372. 

Real  estate,  taxes,  202,  266.  See 
General  property  tax,  Land 
tax. 

Real  taxes.  111. 

Recording  fees,  350. 

Redevances  des  mines,  189. 

Reform  of  taxation  in  United 
States,  200. 

Register,  United  States,  428. 

Registry  tax  on  mortgages,  276. 

Regressive  taxation,  127. 

Relief,  from  income  tax,  England, 
324. 

Religious  expenditures,  23,  31. 

Renick  and  Thompson,  424  n. 

Rented  farms,  271. 

Rents,  100;  taxes  on,  113. 

Repressive  effect  of  taxation. 
139. 

Reproductive  revenues,  91. 

Repudiation  of  debt,  381. 

Revenues,  79  fif . ;  taxes  on,   114, 

Reversion,  93. 

Revolutionary  debt.  United 
States,  411.  /See  French  Revo- 
lution. 


478 


INDEX 


Rhode  Island,  252  ff. 

Ricardo,  142. 

Ripley,  171  n.,  172. 

Rivers  and   harbours,   56. 

Roads,  31,  55. 

Rome,  23,  25,  153. 

Roscher,  6,  386  n. 

Rosewater,  353,  355. 

Ross,  339  n.,  406  flF. 

Roumania,  debt,  368. 

Rowe,  L.  S.,  35. 

Russia,  51;  debt,  368,  404;  ex- 
port duties,  220;  public  lands, 
361 ;  yield  of  excises,  208. 

Sacrifice  theory,  149. 

Saladin  tithe,  164. 

Salable  values  vs.  annual  values, 
145. 

Sales,  receipts  from,  100. 

Salt  conscription,  162;  tax,  215. 
See  Gabelle. 

Schonberg,  108  n.,    156,  158. 

Schools,  exempt,  268.  See  Edu- 
cation. 

Schwab,  171  n.,  173  n. 

Seeley,  181  n. 

Seigniorage,  353. 

Seligman,  8,  11  n.,  86,  87  n.,  102, 
105  n.,  109  n.,  112,  115,  118, 
141,  151,  171,  185  n.,  207,  238, 
293  ff.,  302  n.,  335  n.,  340  n., 
341,  354,  443  n. 

SeUing  value  vs.  rental,  271. 

Senior,  118. 

Servia,  debt  of,  368. 

Sevres,  363. 

Sewers,  32,  56,  76. 

Shaving  warrants,  397. 

Shaw,  A.,  58  n. 

Sherwood,  373  n. 

Shifting,  128,  336  ff.;  338.  See 
Incidence. 

Ship-geld,  162. 

Sidgwick,  118. 

Signal  stations,  56. 

Silks,  210. 

Single  taxes,  134  ff. ;  Henry 
George,  134  ff. 


Sinking  funds,  406  ff . ;  American 
409  ff .,  413 ;  English,  407  ff. 

Situs,  262  ff. 

Slaughter-houses,  60. 

Smith,  Adam,  6, 113,  141,  338, 384. 

Smith,  R.  M.,  238. 

Smuggling,  228. 

Socialism,  19,  134,  150. 

Spain,  debt,  368 ;  war  with  United 
States,  451  ff. 

Special  assessments,  87,  88,  98, 
115,  353  ff.,  355.  See  Bet- 
terments. 

Special  benefit,  14,  16. 

Special  service  income,  94. 

Specific  taxes,  121,  227. 

Spottiswood  Letters,  171  n. 

Springer  vs.  United  States,  lOd  n., 
333. 

Stammhammer,  8  n. 

Stamps   for   fees,   350. 

Standing  army,  54.  -^ 

State,  nature  of,  18.    ^'^ 

Statements,  sworn,  274. 

Steadiness  of  revenues,  21. 

Stein,  L.,  von,  415. 

Stein,  reforms  of,  in  Prussia,  181. 

Steuer,  81. 

Stocks,  public,  300. 

Stoppage  at  source,  301. 

Storage  of  public  funds,  438. 

Stourm,  415. 

Streets,  32,  76. 

Subjective  taxes,  112. 

Sub-treasury,  438. 

Subventions,  98. 

Succession  tax,  302.  See  In- 
heritance tax. 

Sugar  tax,  210. 

Sumner,  118,  237  n. 

Sumptuary,  206. 

Sweden,  debt,  368. 

Switzerland,  debt,  368;  export 
duties,  220;  indirect  taxes  in, 
177. 

System  of  taxation,  133. 

Taille,  159,  160. 

Tallage,  159  n.,  164;  of  groats,  166 


INDEX 


479 


Tariff,    221,    237    ff.,    452.     See 

Customs,       Protection,       Free 

trade. 
Taussig,  237  n. 
Tax,   defined,   87,   95;    list,    130; 

system,    133;     new,    448.     See 

more  specific  terms. 
Tea,  war  tax  on,  454. 
Ten-forties,  393. 
Terminable  annuities,  394. 
Texas,  259. 
Thirteenths,  164. 
Time  element  in  credit,  375. 
Tithe,  164  n. 
Tobacco-monopoly,  116,  120,  215, 

217;  tax,  162,  206. 
"To  be,"  franchise,  282. 
"To  do,"  franchise,  282. 
Toll,  defined,   101,    128;    transit, 

218. 
Tontine  annuities,  394. 
Transfer   of  public  monies,   437, 

438. 
Transit  duties,  218. 
Treasury  debts,  396;    notes,  397. 
Turkey,  debt,  368 ;  export  duties, 

220. 

Unearned  increment,  135  ff. 

Undervaluation,  272. 

Unfunded  debt,  384. 

United  Kingdom,  debt,  368. 
See  Great  Britain,  England. 

United  States,  apportioned  taxes, 
123;  boards  of  equalisation, 
435  ff. ;  Census  Bureau,  90,  94, 
252  n.,  444  n. ;  cost  of  adminis- 
tering justice,  75  ;  ibid.,  collect- 
ing revenues,  44;  ibid.,  de- 
fence, 51 ;  ibid.,  foreign  inter- 
course, 43;  ibid.,  public  build- 
ings, 49 ;  comptroller  and 
auditors,  424  ff. :  control  and 
audit,  424;  corporation  taxes, 
199;  customs,  237  ff.;  debt, 
368,  369,  393  ;  excises,  212  ff. ; 
expenditure  for  education,  57 ; 
ibid.,  roads,  55;  farmers  over- 
taxed,   343;     federal    licenses, 


213 ;  general  property  tax  in, 
246  ff. ;  income  tax,  109,  331  ff., 
334  n. ;  indirect  taxes,  177 ;  in- 
heritance tax,  305 ;  internal  im- 
provements, 56;  internal  reve- 
nue, 128,  213  ff. ;  legal  theory 
of  taxation,  143;  military  sys- 
tem, 51  ff. ;  pensions,  68  ff . ; 
poll  tax,  312;  power  to  tax  in, 
130;  property  taxes  in,  198; 
public  accounts,  441 ;  public 
charities,  64;  sinking  funds, 
409  ff. ;  sub-treasury  system, 
438;  tax  reforms  in,  180;  tax 
system  of,  197;  taxation  of 
mortgages  in,  199;  yield  of 
customs,  220. 
University  education,  58  ff. ;  fees, 
351  ff. 

Vagrancy,  64. 

Value,  criterions,  270,  271 ;  de- 
fined, 272;  salable  vs,  annual 
145. 

Verbrauch,  113. 

'Verein  fUr  Socialpolitik,  238. 

Verification,  189. 

Vermont,  lands  in,  146 ;  taxation 
of  faculty,  147;  general  prop- 
erty tax,  263;  grand  list, 
121. 

Vignes,  159  n. 

Vingtiemes,  159,  160. 

Virginia,  172;  income  tax  in, 
335. 

Voluntary  contributions,  81,  86, 
90. 

Votes  in  Parliament,  419. 

Wages  taxes,  113,  345, 

Wagner,  A.,  35,  108,  108  n., 
109  n.,  113,  156,  317,  384. 

Walker,  172  n. 

War-chest,  370;  cost  of,  50  ff., 
54;  of  1812,  238,  393,  411; 
financial  administration  of, 
445;  Spanish,  451  ff. ;  tariffs, 
240;  taxes  in  United  States, 
1898,  451  ff. 


480 


INDEX 


Warrants,  397. 

Washington,  State,  277. 

Watches,  tax  on,  206. 

Water  supply,  32,  76,  117. 

Waterways,  56. 

Ways  and   Means  Committee   of 

Congress,  420. 
Wealth,     Debt,    and     Taxation, 

United  States  Census  Bureau, 

34,  252,  455. 
Wealth,  estimate   of,    in    United 

States,  290  ff. 
Weather  bureaus,  66. 


Weights  and  measures,  60. 

West,  302  n. 

Williams,  196,  322,  327,  329. 

Wilson,  A.  J.,  54,  231  n.,  322,  419. 

Wilson  bill,  242. 

Wilson,  W.,  3  n.,  424  n.,  428. 

Wisconsin,  261,  306. 

Wood,  147,  171  n. 

Woods,  forest,  and  land  revenuei 

360. 
Wyoming,  312. 

ZoUverein,  233. 


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